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Will Coca-Cola Help You Retire Rich?

Dan Caplinger
February 9, 2012

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  ) is the best-known brand in the world, and with Interbrand estimating its brand value at a whopping $72 billion, the company milks every penny it can from it. With its global presence, it's hard to believe that the maker of such a simple product could have achieved such success. But investors can't afford to look backward at a company's success, and some question whether Coke has the growth left in it to keep being a good value for shareholders. 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.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $155 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 0.53 Pass
  Worst loss in past five years no greater than 20% (24.1%) Fail
Valuation Normalized P/E < 18 22.20 Fail
Dividends Current yield > 2% 2.8% Pass
  5-year dividend growth > 10% 8.9% Fail
  Streak of dividend increases >= 10 years 29 years Pass
  Payout ratio < 75% 50.2% 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 kept its seven-point score. The drink giant doesn't quite squeak under our valuation guidelines, but it has a lot of what conservative investors like to see in a stock.

Coca-Cola has come a long way from its humble beginnings. After getting booted out of the Dow Industrials in 1935, it took Coke more than 50 years to earn its way back in. But along the way, it became an iconic product in American culture and took the world by storm. It's easy to conclude that Coke's fastest growth days are long behind it.

But Coke definitely hasn't stopped growing. A few years ago, the company bought the North American bottling operations of Coca-Cola Enterprises (NYSE: CCE  ) , making itself more vertically integrated, and paid Dr Pepper Snapple (NYSE: DPS