With those factors in mind, let’s take a closer look at Coca-Cola.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $169 billion | Pass |
| Consistency | Revenue growth > 0% in at least four of five past years | 4 years | Pass |
| Free cash flow growth > 0% in at least four of past five years | 4 years | Pass | |
| Stock stability | Beta < 0.9 | 0.50 | Pass |
| Worst loss in past five years no greater than 20% | (24.1%) | Fail | |
| Valuation | Normalized P/E < 18 | 22.97 | Fail |
| Dividends | Current yield > 2% | 2.7% | Pass |
| Five-year dividend growth > 10% | 8.4% | Fail | |
| Streak of dividend increases >= 10 years | 50 years | Pass | |
| Payout ratio < 75% | 50.9% | Pass | |
| Total score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Coca-Cola last year, the company has held onto its seven-point score for the third year in a row. The stock has managed to do a little better, picking up about 10% over the past year.
The beverage business involves a tale of two markets right now. Domestically, the mature market has made it extremely difficult for companies to find solid growth. PepsiCo, Inc. (NYSE:PEP) managed to report a 2.5% increase in sales for its PepsiCo Americas Beverages unit by increasing spending on marketing and adding new products, but that growth figure includes some emerging-market exposure in Mexico. Meanwhile, Dr Pepper Snapple Group Inc. (NYSE:DPS) reported volume declines of 1% in its most recent quarter and warned that 2013 profits would come in below analyst expectations.
Internationally, though, the race is on to capture new markets. Both Coke and Pepsi are working hard to get into countries like India, where a rising middle class is poised to give the companies their best shot at building their customer base and encouraging beverage consumption. Yet in China, Coke has hit a wall and suffered a 4% decline in volume in the fourth quarter.
In Coke’s most recent earnings report, one big worry was the fact that gross margins are at their lowest levels in the past decade, with rising commodity costs squeezing profits. Weakness in Europe was to be expected, given the economic problems there, but the company nevertheless needs to find ways to overcome those headwinds by exploring new avenues for growth.
For retirees and other conservative investors, a half-century of steadily increasing dividends has enriched long-term shareholders immensely. Despite Coca-Cola’s growth challenges, its cash flow looks set to continue producing rich payouts well into the next half-century.
The article Will Coca-Cola Help You Retire Rich? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo.
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