Coca-Cola on the dividend discount model
A share is worth the cash it pays you. For most companies that cash is hard to see, so a DCF has to estimate it from the whole business. For a steady dividend payer like Coca-Cola, the cash is right there: a dividend paid four times a year and raised every year in this record.
The Gordon growthmodel values that stream. It takes today's dividend, grows it, and discounts each payment back at the return shareholders want. It suits a mature payer and fails for a company that pays little or nothing, because then the dividend says little about the value.
1. The dividend
| Year | Dividends | Payments |
|---|---|---|
| 2015 | $1.32 | 4 |
| 2016 | $1.40 | 4 |
| 2017 | $1.48 | 4 |
| 2018 | $1.56 | 4 |
| 2019 | $1.60 | 4 |
| 2020 | $1.64 | 4 |
| 2021 | $1.68 | 4 |
| 2022 | $1.76 | 4 |
| 2023 | $1.84 | 4 |
| 2024 | $1.94 | 4 |
| 2025 | $2.04 | 4 |
| Trailing 12 months to 2026-09-30 | $2.10 | 4 |
The model starts from the trailing dividend: the last four regular payments, $2.10 a share. At $86.11 that is a 2.4% yield.
2. How fast it grows
| Span | From | To | Per year |
|---|---|---|---|
| 5 years | $1.64 in 2020 | $2.04 in 2025 | 4.46% |
| 10 years | $1.32 in 2015 | $2.04 in 2025 | 4.45% |
Five and ten years agree at about 4.4% a year, which is what a steady payer looks like. The model uses the ten year rate, 4.45%, for the next 10 years and slows it evenly to a terminal rate of 2.5%, the rate it then grows at forever. A forever rate should sit at or below long run growth of the economy, or the company would eventually become the economy.
3. The cost of equity
Dividends go to shareholders, so they are discounted at the Cost of equity, not the WACC. It is built with CAPM: a risk-free return plus a premium for owning stocks, scaled by beta.
Beta is how much a stock moves with the market. The SEC files Coca-Cola under industry code 2080(beverages), which maps to Damodaran's Beverage (Soft) industry. Its unlevered beta of 0.58is relevered for Coca-Cola's own debt ($43,558M against a $373,633M market value) to 0.63. A soft drink company moves less than the market, so it gets a beta below 1 and a lower discount rate.
| Risk-free rate | 5.29% |
|---|---|
| Unlevered beta | 0.580 |
| Debt / equitydebt / market cap | 0.117 |
| Levered betaunlevered x (1 + (1 - 25%) x D/E), rounded | 0.630 |
| Equity risk premium | 4.14% |
| Cost of equity5.29% + 0.630 x 4.14% = 7.90% | 7.90% |
4. The value
| Dividend per share, trailing | $2.10 |
|---|---|
| Growth, year 1 | 4.25% |
| Growth, year 10 | 2.50% |
| PV of dividends in years 1 to 10 | $16.99 |
| Dividend in year 11 | $3.00 |
| Terminal value at year 10D11 / (cost of equity - terminal growth) | $55.58 |
| PV of terminal value | $25.99 |
| Value per share | $42.97 |
Ten years of dividends are worth $16.99 today. Every year after that, the Terminal value, is worth $25.99. Together: $42.97 a share, 60.5% of it from the years after the first ten. The one stage textbook formula, D1 / (r - g), gives $39.87, close because Coca-Cola already grows near the terminal rate.
Against $86.11, the model says the shares cost about twice what the dividends are worth at a 7.90% cost of equity. Put the other way, the price only makes sense if the dividend grows 5.4% a year forever after year ten, well above long run growth of the economy.
5. Sensitivity
The two inputs that matter most are the discount rate and the forever growth rate, because the terminal value hangs on the gap between them. Each cell is the value per share for one pair.
| Cost of equity downTerminal growth across | 1.50% | 2.00% | 2.50% | 3.00% | 3.50% |
|---|---|---|---|---|---|
| 6.90% | $44.25 | $48.11 | $52.83 | $58.76 | $66.43 |
| 7.40% | $40.45 | $43.61 | $47.40 | $52.05 | $57.89 |
| 7.90% | $37.24 | $39.87 | $42.97 base case | $46.71 | $51.28 |
| 8.40% | $34.50 | $36.72 | $39.30 | $42.35 | $46.03 |
| 8.90% | $32.13 | $34.02 | $36.20 | $38.74 | $41.75 |
Even the most generous corner, a cost of equity one point lower and terminal growth one point higher, reaches $66.43, still below the price. To get there, the discount rate has to fall a lot. That is the real question for a Coca-Cola buyer: what return do you accept for holding a very safe dividend?
6. Is the growth self-funding?
A dividend can only keep growing if the company keeps enough profit to grow the business. The check is: sustainable growth equals return on equity (ROE) times the share of profit kept (1 minus the payout ratio).
| Return on equity | 40.70% |
|---|---|
| Payout ratioDividends / net income | 66.10% |
| Sustainable growthROE x (1 - 66.10%) = 13.80% | 13.80% |
| Payout implied by terminal growth1 - terminal growth / ROE | 93.86% |
Coca-Cola earns 40.7% on its book equity (LTM net income of $13,701M over $33,633M of equity) and pays out 66.1% of profit as dividends. That supports growth of about 13.8%, far above the 4.5% used. So the growth assumption is not the problem; if anything it is cautious.
Read the ROE with care. Book equity is shrunk by years of buybacks, which makes ROE look higher than the return on new money. The backward check says the same: at a 2.5% forever rate and this ROE, Coca-Cola could pay out about 93.9% of profit forever, more than the 66.1% it pays today.
7. What to take away
The dividend is safe; the price is the question. Coca-Cola pays a growing dividend it can afford. But at a 7.90% cost of equity, with the 10 year Treasury at 5.29%, the dividends alone are worth about half the share price.
Buyers at $86.11 are accepting a lower return than CAPM asks for, or expecting faster growth than the last ten years. Either can be reasonable. The model makes you say which, and by how much.
A dividend model is a good fit here because the dividend is regular, rising and well covered. It would be a poor fit for a company that pays out little, cuts often, or returns cash mostly through buybacks, where the dividend is not the cash an owner really gets.