Why Coke Is The Ultimate Teflon Stock

After Coca-Cola (KO) reported sluggish 2nd quarter results -- a strong dollar and bad weather took the blame -- Chairman and CEO Muhtar Kent said “…we are not happy with our performance,” an expected earnings season mea cupla.

Wall Street’s reaction: no worries, Muhtar.

A quick 2% haircut on the day of the announcement was erased in just a week.

KO Chart

KO data by YCharts

By comparison, McDonald’s (MCD) was down 3.5% in the two days after serving up its own sluggish report, and has yet to show any rebound.

MCD Chart

MCD data by YCharts

The entire consumer defensive sector has been the go-to safe haven for skittish investors ever since the financial crisis. The sector’s 18 forward PE ratio is a 17% premium to S&P Capital IQ’s consensus estimate for the broad S&P 500 index.

Over the past 25 years the more typical premium has been around 10%. Given its seat at the head of the table of global dependables, Coca-Cola has always traded at a premium as well; its 19.1 forward PE ratio is a large 25% ahead of the broad market right now. (That said, Coca-Cola is a downright bargain among the S&P 500’s consumer defensive sector compared to the 30+ forward PE’s for Whole Foods (WFM) and Monster Beverage (MNST). )

In an expensive market you can do a whole lot worse than paying up for one of the most stable balance sheets in existence. It’s telling that the managers at the standout $10.6 billion Yacktman Focused and $12.3 billion Yacktman fund were adding to their long-term Coca-Cola stakes in the second quarter. More on Yachtman stock picks here.

Among the metrics the Yacktman team cares about are a company’s ability to generate free cash flow and a business model that isn’t capital intensive. As this chart shows, Coca-Cola delivers on both fronts:

KO Free Cash Flow Per Share TTM Chart

KO Free Cash Flow Per Share TTM data by YCharts

What attracts plenty of individual investors is one of the surest dividend stories going. Using the max feature in chart view, Coca-Cola’s uninterrupted dividend growth since 1986 has delivered a payout increase of more than 5,000%.

Those dividends have generated near one-third of Coca-Cola’s total return over the past five years.

Add in a consistent share-repurchase program and the net payout yield is a strong 4.5%.

That’s a whole lot to like. But just keep in mind, no stock, not even Coca-Cola—especially with its 21 trailing PE ratio -- is impervious to down markets. Coca-Cola shed nearly 30% during the worst of the 2008-2009 bear market. Yes, of course, that was a lot better than the 43% decline for the broad market. But just a reminder that there’s no such thing as a truly Teflon “safe” stock.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.



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