Why Earnings Multiple Of Coca Cola Stock Will Continue To Remain Elevated?

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If there was ever an opportunity for Coca Cola (NYSE:KO) to drop a good few handles, it is this year. You have the S&P 500 (INDEX:SPAL) down almost 6.2% year to date but Coca Cola stock stood firm and is actually up 1.9% over the same period. The reason why many would have suspected a drop was because Coca Cola’s earnings multiple is a good seven points above its 5 year average (27 compared to 20) plus it is 9 points above the S&P PE ratio of 18.5.

Source: Coca Cola stock price chart by amigobulls.com

The most significant aspect that came out of Coca Cola fourth quarter earnings was its 4% year over year organic sales growth which means the company is still growing meaningfully despite current dollar strength. Therefore, I wasn’t surprised when Coke announced a 6% dividend increase recently which will make the new quarterly payment $0.35 a share. This is essentially why Coca Cola stock has been a huge income story over the last 50+ years. Since 2012, revenues are down almost $4 billion and net income is down almost $2 billion but the company still manages to churn out those dividend increases. Obviously, Coca Cola’s present dividend growth rate can’t continue as it is drastically outpacing earnings growth but 2015 may have been an inflection year for the company as we saw a slight hike in bottom line numbers on a rolling year basis.

If we look at analysts projections over the next few years, we can see that although EPS expectations are lower for 2016, we see a jump in expectations for 2017 (to $2.07). However, top line expectations for 2017 are only at $41.66 billion ($2.6 billion less than 2015). This means continued dollar strength has been priced into the top line despite expecting a growing bottom line. Coca Cola has plenty to gain from meaningful dollar weakness from here. The company derives around 50% of its top line from international markets where sales were down 7% in dollar terms despite reporting higher volumes. Therefore, the $41.66 billion top line figure for 2017 is pessimistic in my view especially when you consider poor economic data emerging from the US as of late.