Regular fool.com.au readers must be wondering if I've topped up my Coca-Cola Amatil Ltd (ASX: CCL) shareholding yet, after several recent articles on the topic.
I haven't, and I blame Flight Centre Travel Group Ltd (ASX: FLT) for offering such a compelling buying opportunity last week. However with the ASX expected to plummet this week over Greek debt woes, Coca-Cola Amatil shares are taking a pummelling and at $9 they are well within buy territory.
When Motley Fool trading rules (preventing me from trading in stocks I write about) allow, I will top up my holdings in Coca-Cola Amatil, and here's why:
- Long term foreign growth
Coca-Cola is experiencing double-digit growth in its Indonesia and Papua New Guinea business line, and that growth is likely to be maintained thanks to an additional $500 million investment provided by its parent company, The Coca-Cola Company.
The actual contribution to earnings is subdued at the moment thanks largely to a weak Indonesian currency, but over the long term the tailwinds are positive and I expect this segment to become a significant contributor to profits over time.
- Strong domestic market position
Coca-Cola is one of the leading beverage sellers in Australia with decent margins, an entrenched market position, and a wide and expanding portfolio of beverages. Forays into beverages other than soft drinks are going well and Amatil recently reported that it was experiencing its fastest growth in non-soft drink categories.
Amatil also has plenty of room to expand further into segments like juices, milks, and coffees and I expect domestic earnings growth to be modest but sustainable into the future.
- Limited Eurozone risk
Although Coca-Cola shares fluctuated sharply last week in response to Euro debt fears, it actually appears one of the companies least likely to be affected by the fallout.
The biggest worry is that investors dumping the Euro might buy Australian dollars, which would make our dollar stronger and unfavourably impact Indonesian profits. However with the vast majority of profits made in Australia and New Zealand, I think this is an insignificant concern and unlikely to persist for the long term.
- High payout ratio
Amatil's management has confirmed its intention to pay out more than 80% of profits as dividends to shareholders in the future. Given that profits are expected to grow at a 'mid-single digit' rate for the next few years, shareholders can experience a dividend bonanza, particularly at today's prices which yield almost 5% plus franking credits.
To be honest I don't like the high payout ratio as I would prefer Amatil to pay down its modest debt or reinvest in the business, but dividends appear sustainable and with interest rates so low there's not much point keeping a few hundred million in the bank.
- It's cheap
At prices of $9.05 at the time of writing, Coca-Cola Amatil shares are less than a dollar away from their 52-week low of $8.19. They're also at their lowest price (excluding 2014) since 2009.
I conducted a detailed analysis on Amatil shares a few weeks ago, and assuming that margins stay weak, capital expenditure rises sharply, and Indonesian profits remain weak, Amatil shares appear to be worth between $11.35 and $12.01 each.
(You can find my full research in this article: "How much are Coca-Cola Amatil shares really worth?")
Shares are changing hands for 20% below that level, and Coca-Cola Amatil looks to be a great buy at today's prices.
