DividendInvestor℠ focuses on the activities of portfolios of Morningstar, Inc. that are invested in accordance with the Dividend Select strategy. These portfolios are managed by Morningstar Investment Management LLC, a registered investment adviser, who manages other client portfolios using these strategies.
From the DividendInvestor news file this week: Duke Energy DUK declared a $0.945 quarterly dividend this week, a 1.9% increase from its previous quarterly rate. And Enterprise Products Partners EPD continued its practice of regular quarterly raises by increasing its quarterly distribution to $0.44, a 0.57% hike. Procter & Gamble PG declared a quarterly dividend that was unchanged from its previous payout. Morningstar increased its fair value estimate for Coca-Cola KO today -- an update from Morningstar Research Services is below. Otherwise, it was another quiet week for the holdings of the Dividend Select portfolios. However, earnings season kicks into high gear next week and we expect to see quarterly results for a number of holdings, including Wells Fargo WFC, Philip Morris International PM, Johnson & Johnson JNJ, BB&T BBT, Genuine Parts GPC, BlackRock BLK, and Omnicom OMC. Best wishes, David Harrell Editor, Morningstar DividendInvestor
News and Research for Dividend Select Portfolio Holdings
Raising Coca-Cola's Fair Value Estimate
by Sonia Vora, CFA | Morningstar Research Services LLC | 07-12-19
We're lifting our fair value estimate for Coca-Cola to $49 per share from $47.50 after incorporating the time value of money since our last update. Our valuation incorporates around 4% organic sales growth on average over our 10-year explicit forecast, with even contributions from volume and price/mix. We expect sustained growth of high-margin smaller packaging sizes, modest net pricing increases, and the bottler refranchising to result in mid-single digit operating income growth longer term. Our fair value estimate implies a price/earnings ratio of 23 times.
We expect Coca-Cola to offset pressure from declining carbonated soft drink consumption in North America (36% of sales) with product and packaging innovation, as well as an expanding portfolio of noncarbonated beverages, allowing for modest top-line gains (with low-single-digit improvements in price/mix annually). We expect steady growth in emerging markets, where per capita consumption remains lower than in developed regions. More specifically, we forecast mid-single-digit organic growth on average in the Latin American (13% of sales, excluding company-owned bottling operations) and Asia-Pacific (15%) segments on average over our forecast. In 2019, we expect above 9% sales growth, supported by the Costa acquisition as well as mid-single-digit organic sales growth.
Our outlook for the next decade also incorporates steady margin improvement, as Coca-Cola benefits from its more asset-light structure (with concentrate operations accounting for 64% of net revenue in 2018, versus 51% in 2017) and reduces its manufacturing and distribution expenses. We expect gross margins to average above 63% over the next five years (around 150 basis points above its five-year historical average), given a greater proportion of higher-margin concentrate sales. Moreover, we expect operating margins to expand at a faster clip, due to Coca-Cola’s ongoing cost savings initiatives, which we think will primarily moderate supply chain and overhead expenses. We estimate these factors will lead to average operating margin around 33% over our forecast, compared with around 27% in 2018.
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