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Will Coca-Cola Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Coca-Cola (NYSE: KO  ) has a simple business: satisfying its customers' thirst. But with the No. 1 brand in the world, the soft-drink giant continually works to enhance its image, earning it a spot among the Dow Jones Industrials (DJINDICES: ^DJI  ) . Yet even as the Dow has set new five-year highs, Coca-Cola's stock has held back since the summer as the company faces some ongoing challenges. Below, we'll revisit how Coca-Cola does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

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 (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 (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.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

Learn more about all the new threats to Coca-Cola's continued market dominance by reading the premium research report we've recently compiled on the beverage giant. Inside, you'll learn everything you need to know about Coca-Cola, with free updates for the coming year. If you own or are considering owning shares in the company, you'll want to click here now and get started!

Add Coca-Cola to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.


Read/Post Comments (1) | Recommend This Article (4)

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  • Report this Comment On February 21, 2013, at 4:07 PM, clo7clo7 wrote:

    Will Coca-Cola help you retire rich? Possibly.

    Here's what my experience has been with Coca-Cola stock. I bought 100 shares in 1986 for $3,819. I have never sold them. Today, after many splits, they have morphed into 1,600 shares, which are worth about $60,384 or 15.8 times my purchase price. I have collected quarterly dividends for as long as I can remember, and after the dividend increase announced today I shall receive within the next year $1,792, which is 46.9% of my purchase price.

    It would be dangerous to rely on just Coca-Cola, but when patience is added to a wise choice the results can be encouraging.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

4/17/2014 4:31 PM
^DJI $16408.54 Down -16.31 -0.10%
DOW JONES INDUSTRI… CAPS Rating: No stars
KO $40.72 Up +0.13 +0.32%
Coca-Cola CAPS Rating: ****
DPS $52.54 Up +0.14 +0.27%
Dr Pepper Snapple… CAPS Rating: ***
PEP $85.55 Up +0.78 +0.92%
PepsiCo, Inc. CAPS Rating: ****

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