Coca-Cola (KO): Let it Ride? I Don’t Think So

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KO 052016 43.95 Yld 3.19 PE 26.56

Returns since April 20, 2010

KO 89.55%     KO with "Divi-X" 104.00%

The Coca-Cola Co is another component of the "Divi-X" Index which closely mirrors the Dow Jones Industrial Average.  There is no particular reason why I chose Coke for this article because for the purpose of this article, the concept applies to all of them, not just Coke.  For those of you interested in a fundamental analysis of the state of Coke today, I won't tease you into something this article is not.  The purpose of this article is to point out a strategy that is used by the "Divi-X" System which I believe is superior to other buy and hold strategies.  One of those strategies being the use of leverage.

Company Profile

The Coca-Cola Company (NYSE: KO) is the world's largest beverage company, refreshing consumers with more than 500 sparkling and still brands and more than 3,800 beverage choices Download video (ZIP) | Download infographic (PDF)

Led by Coca-Cola, one of the world's most valuable and recognizable brands, our company’s portfolio features 20 billion-dollar brands, 18 of which are available in reduced-, low- or no-calorie options. Our billion-dollar brands include Diet Coke, Coca-Cola Zero, Fanta, Sprite, Dasani, vitaminwater, Powerade, Minute Maid, Simply, Del Valle, Georgia and Gold Peak. Through the world's largest beverage distribution system, we are the No. 1 provider of both sparkling and still beverages.  More than 1.9 billion servings of our beverages are enjoyed by consumers in more than 200 countries each day.

Source: http://www.coca-colacompany.com/our-company/infographic-coca-cola-at-a-glance

The Coca-Cola Co and "Divi-X" History

In "The Dividend Times:  An Introduction to The "Divi-X" System,"  I offered five year results using a variety of options using the "Divi-X" System.  Here are the results then:

Ticker Without “Divi-X” Multiplier Pick 25 Multiplier Pick 65 Multiplier Pick 80 Multiplier Pick 100 Multiplier Pick Maxed Maxed Leverage %
KO $17,242 $17,535 $18,106 $18,362 $18,748 $19,984 42.27
 Results based on 100 share lot @ $26.72/share on 4/30/10

The results haven't been stellar but certainly nothing to complain about.  Now, getting back to the title of our column; what we are going to do now, is show you Coca-Cola's results to date using the same amount of  leverage using the "Divi-X" System as opposed to 'letting it ride.'  In other words, I am going to show you how well the "Divi-X" System did compared to someone who borrowed the same amount of money to buy the same number of shares in Coca-Cola and just waited it out.

Let it Ride

First, we're going to show the results using the "Divi-X" System:

KO 043010 26.72 Yld 3.29 PE NA_10YR Ret Scen

click to enlarge $10,000 Investment

A few things to note about this chart:

  1. The "Divi-X" System utilizes amortization when taking a new position, and when taking that new position, you're given the option of amortizing in one of four ways; Fixed Payment, All Dividends, Interest Only, or Payment Percent.  In the example above, we used "Payment Percent," which is similar to the payment method used on credit cards.  Because Coca-Cola was a modest grower over the last six years, the variation in the results from each option was minimal (within 1% to 2% of each other).  However, depending on share price and dividend growth rates, these percentage variations can be quite relevant to your returns.
  2. Our Coca-Cola investment using "Divi-X" doubled just over four and a half years from initiating our April 2010 position.  'Without "Divi-X" has yet to cross that threshold while "Divi-X" still sits above that milestone.
  3. As you will see in the following chart, "Divi-X" not only outperforms 'Without' but also outperforms an investment that 'let it ride,' or did not amortize as the "Divi-X" System did.

If you are reading this article and scratching your head, it's because you haven't learned our very simple system.

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Next, we're going to show you the to-date results of the individual who borrowed on leverage but did not use the "Divi-X" System and chose to 'let it ride.'

KO 043010 26.72 Yld 3.29 PE NA_10YR NoPmts

click to enlarge

A few things to note about this chart:

  1. Even though this investment utilized the exact amount of leverage as the "Divi-X" System, and even though the returns were better than the investment that did not utilize leverage, because the investment did not amortize that leverage the same way "Divi-X" did, the returns lagged those of the "Divi-X" System.  By 6.13% to be exact, or $612.61.
  2. It's also worth pointing out that this investment did not cross the 'double your money' threshold until March of this year; a full sixteen months after "Divi-X" did it back in November 2014.

Dividends

This part is interesting.  Depending on how long you were to hold onto Coke, the differences in the dividend picture vary from not great to terrible if you choose to 'let it ride.'  Below is what the dividend picture looks like if you use the "Divi-X" System:

KO 043010 26.72 Yld 3.29 PE NA_10YR 20YR Yld

click to enlarge

A few things to note about this chart:

  1. You can see that over the last six years, the "Divi-X" Yld has closed the spread with the 'All Cash Yld' almost entirely and by next year will surpass it.  As usual, whether there is ever another dividend increase or not, the "Divi-X" spread will continue to widen year, after year, after year, for many years to come.

Quite a different picture if you chose to let it ride:

KO 043010 26.72 Yld 3.29 PE NA_10YR 20YR Yld.jpg NoPmts

click to enlarge

Just like compounding interest, the difference between the decision to amortize or not may not yield immediate results, but over the long-term, subtle decisions you make upfront could have significant consequences down the road.

  1. Letting it ride, represented in the chart as green, will never catch up to the 'All Cash Yld' because every month, as last months interest expense becomes this months principal, it weighs down the yield more and more until eventually the interest expense exceeds dividend income and ultimately starts providing you with a negative yield (circled in green).
  2. You could argue, that increased dividends will prevent that from happening, but guess what?  That's what the purple line represents and it doesn't work.  It may work, for a new, fast growing, nimble, high profit margin business with an aggressive dividend policy, but not for a slow growth company like Coca-Cola.

Finally, let's look at the long-term effects 'letting it ride' has on your income picture compared to "Divi-X."

KO 043010 26.72 Yld 3.29 PE NA_10YR Details NoPmts

click to enlarge

On the left, if you choose to let it ride, 'Margin Interest' expense already exceeds your monthly 'Net Cash.'  As 'Dividends' rise, so does 'Margin Interest' expense.  'Net Cash' gets an initial pop when there is a dividend increase, but 'Net Cash' declines until the next dividend increase.  I think you know what will happen if there was an absence of a dividend increase.  As time progresses, eventually, the dividend pops will be a blip of a broader down-trend as illustrated above in the 20 Yr dividend chart.

On the right, using the "Divi-X" System, you see there is a constant decline in our 'Margin Interest' expense and as a consequence, you see our gap between total 'Dividends' and 'Net Cash' narrow, meaning every month, we get to keep more and more of our 'Dividends.'

The Next Five Years

Now we're at that point where we simulate a new position in the security of topic.  Here is what a new 'Leverage Projection Worksheet' looks like as of the close on Friday, May 20, 2016 assuming a $10,000 investment.

click to enlarge

Returns Scenarios

click to enlarge

And our five year percentage projections:

Conclusion

This might sound like a lot of trouble to go through for a few extra percentage points on your investment.  I mean, who wants to worry about payment schedules and financing terms.  I totally agree.  What a pain.  That's the beauty of the "Divi-X" System.  It takes care of all that for you.  No checks to write, no payments to miss, no late fees, and no impact on your credit.  In "The Dividend Times:  An Introduction to The "Divi-X" System,"  I show you how to set all of this up on auto-pilot.  You'll be amazed at how ridiculously easy, not just this aspect of it, but every aspect of the "Divi-X" System is.

I hope you found this article useful and we'll check back in on this one next year to see how we're doing.  As always, many happy returns.


Authored by Lee Carroll Wentker

All screen captures are taken from 'The "Divi-X" System Workbook'

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The security showcased here is for learning purposes only. It is not a recommendation or an endorsement of any kind. Do your own due diligence before making any investment.

All work is copyrighted by The Dividend Times, LLC 2015 - 2016

 
 

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