Question

Coca-Cola Amatil (CCA) is one of the largest manufacturers of soft drinks in the Asia-Pacific region and operates in six countries- Australia, new Zealand, Indonesia, Papua New Guinea, Fiji and Samoa. CCA is also listed on the Australian Stock exchange since 1970. Your task is to download CCA's 2017 Annual Report and answer the following questions.

1. Whats is average annual dividend growth rate for CCA between 2013 and 2017? Hint-use information provided in Page 135 in the annual report

2. Do you think CCA will maintain this recent growth rate forever? Justify your answer and if you disagree then also suggest a new dividend growth rate range. Hint- start by reading pages 8-9

3. Suppose the annual dividend growth rate is 5 percent, which will continue into the foreseeable future. What is the Intrinsic Value of CCA's share at 31st December 2018, if you require an annual return of 10 percent ?

4. What was CCA's share price on 31st December 2018?

5. Should you invest in CCA's shares based on 3 and 4 above? Why or why not ?

Please help with the above 5 part question as this assignment is due on 26/04/19 and its 20 marks.

Answer 1

1. Whats is average annual dividend growth rate for CCA between 2013 and 2017? Hint-use information provided in Page 135 in the annual report

It can be said by looking at the dividend history below that the year 2013 was an extraordinary year from the perspective of dividend payment. The company has not reached even near to this level of dividend in any of the 5 years after 2013. Hence, if we base our calculation on this base year, we get a negative dividend growth rate. We should rather base our calculation on the year 2014 and look at the dividend growth rate till 2017. Additionally, since the data for 2018 is also available, I went ahead and included this figure also in the analysis.

Year	2013	2014	2015	2016	2017	2018
Dividend per share (AUD. Cents /share)	56	42	43.5	46	47	47
Annual dividend growth rate		-25.00%	3.57%	5.75%	2.17%	0.00%
Average dividend growth rate (2013-17)	-3.38%
Average dividend growth rate (2014-17)	3.83%
Average dividend growth rate (2014-18)	2.87%

2. Do you think CCA will maintain this recent growth rate forever? Justify your answer and if you disagree then suggest a new dividend growth rate range. Hint- start by reading pages 8-9

Overall, it appears that the profitability of the company is improving at a very slow pace. In the past, the dividend payout has been much higher. This growth is slowing down now. I believe a dividend growth rate of 3% is sustainable, considering the growth rate of the company and the general growth in the FMCG markets in Asia-Pacific region. This is supported by the MD&A in the annual report.

3. Suppose the annual dividend growth rate is 5 percent, which will continue into the foreseeable future. What is the Intrinsic Value of CCA's share at 31st December 2018, if you require an annual return of 10 percent ?

We can use Gordon growth rate model to calculate the fair price of the CCA shares as follows-

D0=	0.47
g=	5%
r=	10%
GGM formula-
P0= D0*(1+g)/(r-g)
P0= 0.47*(1+5%)/(10%-5%)
P0 (fair price)= 9.87

4. What was CCA's share price on 31st December 2018?

A$ 8.19

5. Should you invest in CCA's shares based on 3 and 4 above? Why or why not

The fair price by dividend growth model is 9.87 while the price as of 31^st Dec, 2018 was 8.19. It appears that the share is underpriced as of now. There is a potential for `20% upside. The naïve suggestion would be to buy the share. However, the theoretical fair price is based on a growth rate assumption of 5%, which appears to be on the higher side. If we take the growth rate of 3% as per the historical trend, then we arrive at a fair price of 6.91 per share which suggests that the stock is overpriced. Hence, we need to do further research on this stock before making an investment call.