Valuation (KO):
Method: Dividend Discount Model because the growth of dividend per share is relatively stable.
Holding Period: Coca Cola is the defensive stock because of its low beta (0.721) and doing business in the consumer product. Furthermore, Coca Cola is the large market-capitalization stock and have a lot of liquidity and stable leverage. Investors can hold this stock for a long term (10 years or more) with low market risk, therefore we use 10 years which is the long-term investment horizon for the holding period of Coca Cola and expect to sell this stock in 2021.
Growth: We use the 10-year compound annual growth rate of DPS (13.74%) and EPS (11.87%) to be the growth rate of DPS and EPS respectively because the growth rate of DPS and EPS is relatively stable.
Growth of Dividend:
|
CAGR of DPS (10-year average)
|
8.92%
|
Growth of EPS:
|
CAGR of EPS (10-year average)
|
11.87%
|
Terminal Value: We plan the sell Coca Cola stock in the next 10 years, so we use the average of past 10-year P/E and forecast the EPS to multiply with P/E to stock price in the next 10 years. We are confident that the P/E is suitable due to stability of KO’s P/E and being the defensive stock with stable growth of EPS.
Average of 10-year PE
|
19.59
|
EPS Growth Rate
|
11.87%
|
EPS
| |
2011
|
1.89
|
2012
|
2.12
|
2013
|
2.37
|
2014
|
2.65
|
2015
|
2.97
|
2016
|
3.32
|
2017
|
3.71
|
2018
|
4.15
|
2019
|
4.64
|
2020
|
5.20
|
2021
|
5.81
|
Terminal Value
|
113.87
|
We forecast the EPS at the end of 2021 to be 5.81 and multiply with the 10-year average of PE to get the price of Coca Cola of $113.87 in the next 10 years. We expect to sell Coca Cola at the end of 2021 to get the cash of $113.87.
Cash Flow Received from Dividend and Stock:
DPS Growth Rate
|
8.92%
| ||
DPS in 2011
|
0.94
| ||
(1)
|
(2)
|
(1) + (2)
| |
DPS
|
Terminal Value
|
Cash Flow
| |
2012
|
1.02
|
1.02
| |
2013
|
1.12
|
1.12
| |
2014
|
1.21
|
1.21
| |
2015
|
1.32
|
1.32
| |
2016
|
1.44
|
1.44
| |
2017
|
1.57
|
1.57
| |
2018
|
1.71
|
1.71
| |
2019
|
1.86
|
1.86
| |
2020
|
2.03
|
2.03
| |
2021
|
2.21
|
113.87
|
116.08
|
WACC: We use the market return (Rm) from Bloomberg and risk free rate from10-year government bond rate (Rf) as inputs in CAPM(Capital Asset Pricing Model) to get the market risk premium (Rm - Rf) of 8.72%. Therefore we get the cost of equity (Ke) equal to 8.13%.
Cost of Equity (CAPM)
| |
Rm
|
10.56%
|
Rf
|
1.84%
|
Rm - Rf
|
8.72%
|
Beta
|
0.721
|
Ke
|
8.13%
|
Fair Value:
Ke
|
8.13%
| ||
Cash Flow
|
Discounted Cash Flow
| ||
1
|
2012
|
1.02
|
0.95
|
2
|
2013
|
1.12
|
0.95
|
3
|
2014
|
1.21
|
0.96
|
4
|
2015
|
1.32
|
0.97
|
5
|
2016
|
1.44
|
0.97
|
6
|
2017
|
1.57
|
0.98
|
7
|
2018
|
1.71
|
0.99
|
8
|
2019
|
1.86
|
1.00
|
9
|
2020
|
2.03
|
1.00
|
10
|
2021
|
116.08
|
53.12
|
Intrinsic Value
|
61.90
| ||
Intrinsic Value
|
61.90
|
Market Value
|
37.54
|
Undervalues
|
64.89%
|
There are some reasons that I am confident that my valuation is correct. Firstly, Asia or other developing countries have a high potential to grow. As shown in the table above, Indian and Chinese people drink Coke just only 11 and 34 bottles per year respectively whereas US people drink it 394 bottles per year. Secondly, KO has a great marketing and distribution channel that can create strong brand value for Coke. Coke also use high leverage and repurchase its stocks back every year which magnify the EPS and DPS for Coke. But you should aware of the failure of the Coke products and people concern more on their health which can slow down the growth rate of KO.
Reference: All information is obtained from Bloomberg.
Appendix:
Historical 10 years P/E, EPS & DPS (Quarterly)
| |||
Date
|
Trailing 12-month P/E
|
Trailing 12-month EPS
|
Trailing 12-month DPS
|
31/12/2002
|
25.4884
|
0.86
|
0.4
|
31/3/2003
|
23.5349
|
0.86
|
0.41
|
30/6/2003
|
26.52
|
0.875
|
0.42
|
30/9/2003
|
24.2712
|
0.885
|
0.43
|
31/12/2003
|
27.4324
|
0.925
|
0.44
|
31/3/2004
|
25.533
|
0.985
|
0.455
|
30/6/2004
|
24.5049
|
1.03
|
0.47
|
30/9/2004
|
19.4417
|
1.03
|
0.485
|
31/12/2004
|
20.2136
|
1.03
|
0.5
|
31/3/2005
|
20.1304
|
1.035
|
0.515
|
30/6/2005
|
19.7867
|
1.055
|
0.53
|
30/9/2005
|
19.8119
|
1.09
|
0.545
|
30/12/2005
|
18.4908
|
1.09
|
0.56
|
31/3/2006
|
19.0318
|
1.1
|
0.575
|
30/6/2006
|
19.0354
|
1.13
|
0.59
|
29/9/2006
|
19.342
|
1.155
|
0.605
|
29/12/2006
|
20.3586
|
1.185
|
0.62
|
30/3/2007
|
19.6721
|
1.22
|
0.635
|
29/6/2007
|
20.5137
|
1.275
|
0.65
|
28/9/2007
|
21.7689
|
1.32
|
0.665
|
31/12/2007
|
22.7296
|
1.35
|
0.68
|
31/3/2008
|
21.6619
|
1.405
|
0.7
|
30/6/2008
|
17.5017
|
1.485
|
0.72
|
30/9/2008
|
17.1133
|
1.545
|
0.74
|
31/12/2008
|
14.3714
|
1.575
|
0.76
|
31/3/2009
|
14.0415
|
1.565
|
0.775
|
30/6/2009
|
15.7862
|
1.52
|
0.79
|
30/9/2009
|
17.7228
|
1.515
|
0.805
|
31/12/2009
|
18.6885
|
1.525
|
0.82
|
31/3/2010
|
17.2414
|
1.595
|
0.835
|
30/6/2010
|
15.006
|
1.67
|
0.85
|
30/9/2010
|
17.0116
|
1.72
|
0.865
|
31/12/2010
|
18.8453
|
1.745
|
0.88
|
31/3/2011
|
18.7401
|
1.77
|
0.895
|
30/6/2011
|
18.4863
|
1.82
|
0.91
|
30/9/2011
|
18.0642
|
1.87
|
0.925
|
30/12/2011
|
18.3168
|
1.91
|
0.94
|
30/3/2012
|
19.124
|
1.935
|
0.96
|
29/6/2012
|
19.9974
|
1.955
|
0.98
|
28/9/2012
|
19.5013
|
1.945
|
1
|
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