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Both companies may seem like a strange pair to compare, but this helps us understand the long term investment scenario for both stocks. General Electric (NYSE: GE) and Coca Cola (NYSE: KO) are both iconic American companies that have seen better days and are wondering about their short-term free cash flow (FCF) generation and their long-term growth prospects. Let's take a look at both companies and determine which one is the best buy.
Is Coca-Cola's dividend safe?
Coca-Cola recently increased its quarterly dividend from $ 0.39 to $ 0.40 per share, which means the stock trades on a forward yield of 3.6% at the time of writing.
This is good news for investors who once owned a Dividend King: Coca-Cola has increased its dividend for more than 50 consecutive years. But here's the problem: Coca-Cola's dividend was not covered by its FCF in 2018, and it is unlikely that it will be in 2019 either.
|
Metric |
Coca-Cola Estimates 2019 |
Coca-Cola 2018 |
|---|---|---|
|
Cash flow from operations |
$ 8 billion |
$ 7.32 billion |
|
Capital expenditure |
$ 2 billion |
$ 1.35 billion |
|
Free movement of capital |
$ 6 billion |
$ 5.97 billion |
|
Dividends paid |
$ 6.9 billion |
$ 6.64 billion |
Data source: Coca-Cola company presentations.
The situation is obviously not sustainable, especially as management aims to grow the dividend as a function of FCF in order to achieve a payout ratio of 75%.
However, earnings growth and cash flow generation are actually hampered by management's efforts to restructure its business and improve its long-term productivity.
Coca Cola's growth initiatives
Initiatives such as the reorganization of the company's bottling business and investment in growth initiatives such as the acquisition of Costa (coffee) and other beverages are considered to lead to improved productivity as well as earnings growth and cash flow. Management expects long-term organic revenue growth of 4% to 6%, with EPS increasing from 7% to 9% and a conversion of net income to FCF up from 90% to 95% over 70% in 2018.
It is a set of ambitious goals and, if it is achieved, the dividend will look to be sustainable in a few years. However, given the fact that management has already given up the objective of improving the operating margin, which goes from 27% in 2017 to 34% and above by 2020, due from the impact of acquisitions, investors are right to question it.
In the long run, investors should also consider whether Coca-Cola and PepsiCo can take advantage of the opportunities offered by emerging market growth to offset any decline in demand due to changes in consumer tastes, from sweetened soft drinks to more health-conscious options.
In this context, it should be noted that Coca-Cola, and Pepsico in this case, have significantly underperformed the market over the past decade, despite numerous attempts to diversify their product lines and markets. 39, increased sales of snacks (Pepsico).
KO data by YCharts.
General Electric's cash flow problems
The word is out. GE's industrial FCF is expected to be negative in 2019, according to CEO Larry Culp at a recent conference. However, unlike Coca-Cola, the determining factor of GE's share price is not its dividend yield, but rather its earnings and FCF prospects.
It's no secret that GE is going through a very difficult period and that profits and cash flow are being hampered by the combination of significant restructuring measures taken by GE Power and the ramp-up of GE's LEAP loss-making engine. Aviation – Do not worry too much about this, as LEAP engines will start generating very profitable revenues for services and the aftermarket in the next few years.
With GE, the question is what kind of cash flow will the company generate in a few years? Culp will likely shed some light on this issue in the near future – at least by possibly describing the unique costs in 2019. With this figure, analysts can better estimate the underlying rate of GE's CLF.
The two iconic companies are facing uncertainty in 2019. Image Source: Getty Images.
The long-term future of General Electric
What we do know is that GE Aviation (one of three long-term businesses with GE Power and GE Renewable Energy) generated a segment profit of $ 6.47 billion in 2018 and is expected to to post single-digit earnings growth in 2019. The conversion of margins, earnings and cash flow is expected to improve at GE Aviation in the coming years as LEAP's production ramp is moderated and that the aftermarket revenues will start to be profitable.
Apart from any potential problem at GE Capital, this leaves the shape of margin recovery at GE Power to be desired. As Culp pointed out, it will take some time for GE Power to recover.
In addition, the demand for GE's basic gas turbines can be structurally challenged by the lower cost of renewables and storage, which is likely to increase the demand for renewable energy. The jury is on the subject.
Which stock is the best?
Looks like General Electric is the better buy but that does not say either is a well buy now. If I have to buy one and keep it for a decade, then GE wins, in my opinion.
Why? The potential fallout from a potential failure on its goals could be significant for Coca-Cola and any dividend reduction would hit the company hard. Meanwhile, with a forward P / E ratio times 21, it is difficult to say that the stock has significant upside potential.
GE also faces a significant risk of loss, but Siemens plans to generate a small single-digit margin in its energy sector in 2019, so that it is possible to take advantage of gas turbines. In addition, reducing the volume of a company that has been inflated by the excessive optimism of previous GE management could significantly reduce costs and bring GE Power back to high single-digit margins over time. This could be enough to see the stock get a revaluation, while being supported by a strong aviation segment.
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