Would Ben Graham Consider Coca-Cola (KO) a Defensive Stock?

Coca-Cola does not have the profile of a defensive investment based on the requirements of Ben Graham. The Beverages firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.

Coca-Cola Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 6 year average earnings per share (1.68) * 6 year average book value per share (6.016) = $17.1

At today's price of $54.28 per share, Coca-Cola is now trading 217.5% above the maximum price that Graham would have wanted to pay for the stock.

Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Positive Retained Earnings From 2008 To 2022, A Solid Record Of Dividends, and Decreasing Earnings Per Share

Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Coca-Cola had positive retained earnings from 2008 to 2022 with an average of $59.52 Billion over this period.

Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.We are going to compare Coca-Cola's earnings per share averages from the two 'bookends' of the 16 year period for which we have data. The first bookend comprises the years 2007, 2008, and 2009, whose EPS values of $2.57, $2.49, and $2.93 average out to $2.66. Next we look at the years 2020, 2021, and 2022, whose values of $1.79, $2.25, and $2.19 average out to $2.08. The growth rate between the two averages does not meet Graham's standard since it is -21.8%.

Coca-Cola has offered a regular dividend since at least 2008. The company has returned an average dividend yield of 3.0% over the last five years.

Negative Current Asset to Liabilities Balance and an Average Current Ratio

Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Coca-Cola fails on both counts with a current ratio of 1.2 and a debt to net current asset ratio of -0.8.


According to Graham's analysis, Coca-Cola is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.

2018-02-23 2019-02-21 2020-02-24 2021-02-25 2022-02-22 2023-02-21
Revenue (MM) $35,410 $34,300 $37,266 $33,014 $38,655 $43,004
Gross Margins 63.0% 62.0% 61.0% 59.0% 60.0% 57.0%
Operating Margins 21% 27% 27% 27% 27% 25%
Net Margins 4.0% 19.0% 24.0% 23.0% 25.0% 22.0%
Net Income (MM) $1,248 $6,434 $8,920 $7,747 $9,771 $9,542
Net Interest Expense (MM) -$164 -$261 -$383 -$1,067 -$1,321 -$433
Depreciation & Amort. (MM) -$1,260 -$1,086 -$1,365 -$1,536 -$1,452 -$1,260
Earnings Per Share $0.29 $1.5 $2.07 $1.79 $2.25 $2.19
EPS Growth n/a 417.24% 38.0% -13.53% 25.7% -2.67%
Diluted Shares (MM) 4,324 4,299 4,314 4,323 4,344 4,350
Free Cash Flow (MM) $8,501 $8,927 $11,547 $10,832 $13,884 $12,427
Capital Expenditures (MM) -$1,571 -$1,300 -$1,076 -$988 -$1,259 -$1,409
Net Current Assets (MM) -$32,374 -$33,524 -$44,872 -$46,772 -$46,949 -$44,346
Long Term Debt (MM) $31,182 $25,364 $27,516 $40,125 $38,116 $36,377
Net Debt / EBITDA 3.65 3.18 3.04 3.25 2.56 2.26
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.