Should you buy Coca Cola Amatil Ltd for its big dividend?

Credit: Coca Cola

After what has been an underwhelming earnings season from market leaders BHP Billiton Limited (ASX: BHP) Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL), investors could be forgiven for thinking blue-chip stocks were done and dusted.

Nevertheless, 29% owned subsidiary of The Coca Cola Company,  Coca Cola Amatil Ltd (ASX: CCL), reported earnings on Friday that revealed that there’s still life left in some blue chips of the S&P/ASX 100 Index (ASX: XTO).

Here’s why.

Company results

Coca Cola Amatil reported 2016 half-year results last Friday, seemingly disappointing the market as its share price tumbled 4.6% following the announcement. On Monday, its shares completed a 180 degree reversal, rising 5.7% despite a broader market sell-off.

Monday’s price rise was, in my opinion, driven by closer inspection of Coca Cola’s robust underlying results.

Growth signs

Following years of sales attrition, Coca Cola Amatil managed to report headline growth for the first time in years. Group earnings (EBIT) rose 3.2% to $327 million, thanks in part to strong growth in Indonesia and Papua New Guinea – two specific growth engines management is targeting. This led to a net profit attributable to shareholders (NPAT) of $204.1 million for the half, up 8.9% on the prior corresponding period.

Pleasingly, Coca Cola Amatil’s NPAT growth came from high-quality headline earnings growth (as opposed to one-off items). Earnings per share swelled 7.8% to 26 cents for the half, placing its shares on a forecast price-earnings of 18.5x.

Whilst not necessarily cheap in my view, Coca Cola Amatil’s strong cash generation, solid dividend yield of 4.3% (fully-franked) and forecast mid-digit earnings growth garners it a position in most portfolios.

Outlook concerns

Like most blue chips, however, the key issue is portfolio allocation. With Coca Cola Amatil commanding a $7.4 billion market capitalisation, mid-digit growth is no ordinary task off such a large base.

As market giants Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW) have shown, high quality growth becomes harder to achieve as intense market competition, changes in customer preferences and company complacency makes it difficult for large companies to continue growing at modest rates.

Nonetheless, Coca Cola Amatil’s management appears attuned to this fact, noting the need to refresh its product mix and target new growth markets like South East Asia. Although the strategy appears to be working, with the latter segment reporting 65.2% EBIT growth (from Indonesia and PNG), a key test for management will be navigating changing consumer tastes and preferences.

Accordingly, investors should maintain a small position in Coca Cola Amatil until its outlook becomes clear.

Foolish takeaway

Coca Cola Amatil’s results demonstrate that you can never write-off a quality blue chip stock. With this being said, however, investors must remember that they simply mustn’t buy a stock because it has earned “blue chip” status. Coca Cola Amatil’s shareholders have endured years of profit (and share price) declines, with its transformation strategy only showing signs of success in its most recent results.

Although the fruits of its resilient business model are finally coming to the fore, long-term investors must remember that quality stocks should only be purchased at the right price. In my view, the current price of Coca Cola Amatil appears a bit expensive given its lingering outlook concerns and thus following Monday’s strong rise, Coca Cola Amatil is a hold in my books.

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Motley Fool contributor Rachit Dudhwala owns shares of Coca-Cola Amatil Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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