# Coca-Cola Co. (KO)

## Dividend Discount Model (DDM)

Medium level of difficulty

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Coca-Cola Co., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 7.55%
0 DPS01 1.56
1 DPS1 1.21 = 1.56 × (1 + -22.21%) 1.13
2 DPS2 1.02 = 1.21 × (1 + -15.54%) 0.89
3 DPS3 0.93 = 1.02 × (1 + -8.88%) 0.75
4 DPS4 0.91 = 0.93 × (1 + -2.21%) 0.68
5 DPS5 0.95 = 0.91 × (1 + 4.45%) 0.66
5 Terminal value (TV5) 32.21 = 0.95 × (1 + 4.45%) ÷ (7.55%4.45%) 22.39
Intrinsic value of Coca-Cola Co.’s common stock (per share) \$26.50
Current share price \$52.67

Based on: 10-K (filing date: 2019-02-21).

1 DPS0 = Sum of the last year dividends per share of Coca-Cola Co.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.23% Expected rate of return on market portfolio2 E(RM) 11.54% Systematic risk of Coca-Cola Co.’s common stock βKO 0.57 Required rate of return on Coca-Cola Co.’s common stock3 rKO 7.55%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rKO = RF + βKO [E(RM) – RF]
= 2.23% + 0.57 [11.54%2.23%]
= 7.55%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Coca-Cola Co., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends 6,644  6,320  6,043  5,741  5,350
Net income attributable to shareowners of The Coca-Cola Company 6,434  1,248  6,527  7,351  7,098
Net operating revenues 31,856  35,410  41,863  44,294  45,998
Total assets 83,216  87,896  87,270  90,093  92,023
Equity attributable to shareowners of The Coca-Cola Company 16,981  17,072  23,062  25,554  30,320
Financial Ratios
Retention rate1 -0.03 -4.06 0.07 0.22 0.25
Profit margin2 20.20% 3.52% 15.59% 16.60% 15.43%
Asset turnover3 0.38 0.40 0.48 0.49 0.50
Financial leverage4 4.90 5.15 3.78 3.53 3.04
Averages
Retention rate -0.71
Profit margin 16.95%
Asset turnover 0.45
Financial leverage 4.08

Dividend growth rate (g)5 -22.21%

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-25).

2018 Calculations

1 Retention rate = (Net income attributable to shareowners of The Coca-Cola Company – Dividends) ÷ Net income attributable to shareowners of The Coca-Cola Company
= (6,4346,644) ÷ 6,434 = -0.03

2 Profit margin = 100 × Net income attributable to shareowners of The Coca-Cola Company ÷ Net operating revenues
= 100 × 6,434 ÷ 31,856 = 20.20%

3 Asset turnover = Net operating revenues ÷ Total assets
= 31,856 ÷ 83,216 = 0.38

4 Financial leverage = Total assets ÷ Equity attributable to shareowners of The Coca-Cola Company
= 83,216 ÷ 16,981 = 4.90

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.71 × 16.95% × 0.45 × 4.08 = -22.21%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$52.67 × 7.55% – \$1.56) ÷ (\$52.67 + \$1.56) = 4.45%

where:
P0 = current price of share of Coca-Cola Co.’s common stock
D0 = the last year dividends per share of Coca-Cola Co.’s common stock
r = required rate of return on Coca-Cola Co.’s common stock

#### Dividend growth rate (g) forecast

Coca-Cola Co., H-model

Year Value gt
1 g1 -22.21%
2 g2 -15.54%
3 g3 -8.88%
4 g4 -2.21%
5 and thereafter g5 4.45%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -22.21% + (4.45%-22.21%) × (2 – 1) ÷ (5 – 1) = -15.54%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -22.21% + (4.45%-22.21%) × (3 – 1) ÷ (5 – 1) = -8.88%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -22.21% + (4.45%-22.21%) × (4 – 1) ÷ (5 – 1) = -2.21%