Coca-Cola Earnings: This Cash Is For You!

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following a good week for U.S. stocks, the market opened an abbreviated week mixed on Tuesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.08% and 0.22 %, respectively, at 10:15 a.m. EST. Coca-Cola (NYSE: KO  ) released its quarterly earnings report this morning, while fellow Dow component Wal-Mart will do the same on Thursday. Investors will also be anticipating the Thursday release of the minutes of the Federal Reserve's January meeting, during which the central bank further reduced the size of its monthly bond purchases to $65 billion.

The market is not reacting well to Coca-Cola's earnings, sending shares down 3.6% at 10:15 a.m. EST. First, let's get to the headline numbers: Coca-Cola's comparable earnings per share for the fourth quarter came in at $0.46, up 2% year on year and exactly in line with Wall Street's expectations. Revenue, on the other hand, declined 4% year on year to $11.03 billion, 2% shy of the consensus estimate.

Coca-Cola ceased providing forward earnings guidance in late 2002 (more companies ought to do the same). Nevertheless, it has now managed to hit EPS estimates on the nose for the past three quarters (which makes me wonder if there isn't a bit of number massaging going on), with two earnings "beats" prior to that.

However, once you run your finger up the profit and loss statement, the record isn't quite as rosy: On EBITDA (earnings before interest, taxes, depreciation and amortization -- a crude measure of cash flow), Coca-Cola has missed estimates in four of the past five quarters (including this one); on revenue, it's three misses out of five.

Still, hitting or missing Wall Street's numbers isn't what ultimately creates shareholder wealth. Coca-Cola has been doing more than its bit to return cash to shareholders. In 2013, it paid out $5 billion in dividends and bought back $3.5 billion worth of shares, at the high end of its stated outlook of $3 billion to $3.5 billion. Add the two together and you get a total capital return of $8.5 billion; as such, the company paid through to shareholders every single dollar of cash flow it generated last year. In 2014, Coca-Cola is targeting net share repurchases of $2.5 billion to $3 billion. The shares ought to be analyzed (and bought) as a claim on a low-growth cash cow.

Coca-Cola is an icon of American business and it remains an extraordinary franchise. However, between its gargantuan size, changing consumer tastes, and rising public health concerns regarding sugar, high-quality growth will be increasingly hard to achieve. Investors can buy the shares as a relatively safe income vehicle, all the while keeping on eye on the risk factors I mentioned above.

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