A Dividend and Slow Growth or Fast Growth With No Dividend?
Readers offer their thoughts on whether it's better to own a longtime blue chip or a leading Internet firm.
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Is a bird in the hand worth two in the bush? The answer, according to Morningstar.com Discuss forum participants, is yes. Posting in the HandsOn forum of Morningstar.com's Discuss boards, I asked readers whether they'd rather own
Coca-Cola (KO), a company that lacks exciting growth prospects but pays a reliable dividend, or Amazon.com (AMZN), which doesn't pay a dividend but has featured strong growth. Amazon had its backers, with several posters noting that they loved the firm's service and the way it has revolutionized retailing. But the majority of respondents said that Coke's dividend yield, at roughly 2.5%, as well as the company's stability, iconic brand, and history of dividend growth, makes it hard to pass up.
A healthy contingent of respondents wasn't particularly excited about either choice. Although many investors voiced trepidation about Amazon's meager profitability to date and high valuation, other respondents said that Coke's current share price, as well as the long-term prospects for the soft drink industry, gives them pause.
To read the complete thread or share your own take on the Coke-versus-Amazon question, click here.
'The Choice Between the Two Would Depend on My Age'
Several posters cautioned, quite rightly, that forming an appropriate answer to this question should depend on time horizon. While younger investors might be able to withstand the volatility that will tend to accompany a fast-growing business like Amazon.com, Coca-Cola's history of profitability and ability to pay a dividend will tend to smooth its ride for investors with shorter time horizons.
Galeno wrote, "[I'd pick] Amazon when I was younger. Coke today. Like roller coasters, the older I get the smoother and less scary I want the ride to be."
Amazon shows up in Meddguy's portfolio, but Coke looks more appealing to this investor today. "I am invested in Amazon, but not in Coke," Meddguy shared. "However, this investment was made a number of years ago when (obviously) I was a lot younger, right after the dot-com crash. If I were investing today, I probably would choose Coke. At my present age, I am looking for dividends, and not so much for growth."
Keeping time horizon and goals in mind, Rllucky sees Amazon shares as the better bet at this life stage, when building financial capital is a key goal. "From my perspective the choice between the two would depend on my age. At this point in life, I am looking for investments that will generate the greatest capital appreciation, not the ability to generate income in the form of dividends or bond payments. Coke is a fantastic business, but when compared with high-quality growth stocks such as Amazon, Amazon will allow for me to build the largest nest egg as possible. [That's] important to me, because the more capital I have in retirement, the more income I can generate from my assets. Right now I am working so my job is my major source of income with a fractional amount of cash coming from dividends paid out by growth oriented stocks. And generating cash from dividend paying stocks is not a priority."
'A Better Business Than Coke'
Yet Rossinator's post illustrates that Amazon isn't just appealing for the young set, and that not every person closing in on retirement is focused on income. "Even though I am 60 years young, I aim to manage my portfolio for total return for the rest of my days. So I would pick Amazon. I suspect they have the longest runway for future growth and entry into potential new areas of commerce worldwide. That is, Amazon may find new, profitable lines of business to get involved in, whilst Coke's future growth is primarily selling additional bottles of liquids into heretofore untapped markets."
GeneVeryDry, while noting that it's tough to disagree with Coca-Cola shareholder
Berkshire Hathaway (BRK.A) (BRK.B), prefers Amazon's business, too. "While Coke has great management and history, their most important products are sugary, fizzy, and lacking in intrinsic value. Amazon, on the other hand, is 1) a retailer with a better business model than others, 2) a solid Web-services provider, and 3) a competitive seller of electronic books and entertainment. In the first two product lines, Amazon is dominant. To me, it's a better business than Coke, and I actually have invested in Amazon, not Coke."
If forced to choose between shares in Amazon and Coke, OceanMinded goes for the KO--but admires Amazon's innovation. "The way Amazon has revolutionized e-commerce is remarkable. Their processing centers are about as innovative as they get with robots going through aisles pulling products minutes after orders are placed." But this poster also sees impediments to the firm maintaining its torrid growth rate. "I just see a lot more headwinds going forward--battling Netflix (NFLX), Apple (AAPL), and all the media companies for digital content, going head to head with eBay (EBAY) and other online retailers, Internet sales tax issues. I just don't see them growing at the rate they have been over the last 10 years, and for that reason I would be hesitant to purchase shares at these levels."
Similar concerns loom large for $unshine, who wrote, "In Amazon's space now their business model is being encroached by eBay and Google (GOOG) is sort of on the edge of being a competitor. I believe it would be relatively easy for some big tech company to duplicate the Amazon business model, and begin to take market share… When you add all these elements up, the decision is really about which company has the business model that will propel future profit to return value to shareholder."
'I Prefer Growth With Earnings'
Indeed, many of the posters who said they'd opt for Coke shares said they would do so not because they love the company, but because it offers more certainty than Amazon. Mckinm wrote: "With the no-dividend high-growth stock [Amazon], you need to make a lot more assumptions. Its future is inevitably more uncertain. Its valuation will depend on them not messing up in strategy or execution, on the discount rate you choose, on your estimate of their cost of capital (which has to be an estimate), on many more things than [stable dividend payers like Coca-Cola]."
Stockvapors is also in "show me the money" mode, and Amazon hasn't delivered. "I'm not against growth but I prefer growth with earnings. Amazon has been around a while but still seems to struggle with turning that great earnings growth into income. Maybe they are reinvesting or paying themselves more and that explains the fact that expenses seem to be rising faster than revenue but in either case, I want a stock that has at least one eye focused on the shareholder."
Chief K opined that companies one loves don't always translate into good stocks. "I like Amazon; it is a great company to buy stuff from, but it is not, in my humble opinion, a place for my retirement income assets."
In order to like Amazon, dndhatcher believes, one must subscribe to "the greater fool theory." "I have a hard time buying something for no other reason than the hope that in the future I can find some sucker willing to buy it from me for more," this poster wrote.
'I'd Rest Easier With KO"
Other posters think Coke looks attractive in its own right because of its decent dividend, history of dividend growth, and iconic brand.
Mckinm summed up the thesis as follows: "You know they've survived this long, you know that they've committed to a dividend, you know the dividend and you know it will probably grow with the company's earnings. As the company expands its operations beyond the reaches of the U.S., you know its revenues will probably increase faster than US GDP. If it's got strong competitive advantages, you can expect the dividend's growth rate to at least outpace inflation."
In a similar vein, OceanMinded is attracted to Coke's predictability. "Even though the stock is a bit pricey now," this investor wrote, "its business is predictable and has been profitable in good times and bad. You can buy Coca-Cola's products in 200-plus countries and there is still room to tap more growth in emerging markets. A 2.5% dividend is a nice kicker, but there is something to be said about a company that has raised their dividend every year for the past fifty years. It shows stability and execution, and in my opinion, it's one of the most rewarding features of taking ownership in a company."
Coke's brand recognition was a recurrent theme among posters who would choose shares in the beverage maker over Amazon. Chief K wrote, "I'm very close to retiring, and I prefer the company with one of the strongest brand names, in consumer products, on the planet."
Cgajowski also takes comfort in the Coca-Cola brand. "I don't understand all the forces at work that will carry Amazon forward or sideways or back, while Coke is a behemoth that has maintained worldwide shelf space. I'd rest easier with KO."
A greater awareness of the health effects of sugary sodas could be a headwind for Coke, noted OceanMinded, but the firm's other products and global reach could help make up for that weakness. "The good thing is that Coke has a pretty broad product line. They also have a pretty solid history of making acquisitions like Vitamin Water and Odwalla. I think what's important is they have the infrastructure setup around the world and have consistently shown the ability to adapt to consumers in different parts of the world."
Rathgar believes that Coke has more staying power than Amazon. "Twenty years from now people will still be drinking Coke products in 280 countries. Will Amazon still be around? Maybe, maybe not."
'It's All About the Income'
Other posters said that they're specifically attracted to Coke's dividend, as well as its history of dividend growth. Reti59 summed up the appeal of a steady dividend in turbulent times. "I would own Coke, because I get paid regardless of the fluctuation of the stock price/market."
Ditto for Dan6912, who wrote, "It's all about the income. I'll have a Coke and a smile!"
Yet income-minded investors were quick to point out that Coke's dividend isn't all that great. TheShadow wrote, "I prefer dividend bearing stocks, but they need to be closer to 3% for consideration."
WillH1 also looks for higher yields, noting, "If income is the focus, give me a master limited partnership."
Indeed, dividend growth, rather than current yield, is the most appealing attribute for Craigc. "With dividend growth of around 8%-9% during the last five years and only increases over the last 25 years, I would pick KO. If you hold that for 10 years and it continues with the same level of growth, you're making more than 10% a year on your initial investment. Hold it longer, and you're making more. And that's not even taking into account any increase in share value."
'Neither Company Is Much of a Bargain'
Other posters noted that Coca-Cola is more attractively priced (or perhaps less outlandishly priced) than Amazon, based on its underlying fundamentals. Matthew9 wrote, "While neither company is much of a bargain right now, I'd have to go with Coke. Both stocks are overvalued but Amazon is the higher of the two by a long shot. If the scenario was turned around and the valuations of both were attractive, I'd prefer to buy Amazon, because in the long-term I expect it to continue to grow much faster than Coke."
Academic agreed that Amazon's valuation is unattractive. "$248 for a stock that has traded publicly for 16 years, never earned more than $2.53 in a year, and with negative earnings over the last year? Perhaps Amazon actually is a great investment, but I'm happy to leave it to others. There are just too many examples of investors getting burned paying about 100 times earnings for a supposedly promising future."
Yet value-minded posters were also quick to note that neither Amazon nor Coke is much of a bargain right now. Retiredgary balked, "I would not buy either right now. They are both very expensive. They are fine companies which can be held as long term investment, but I'd wait for lower prices, maybe this summer. Individual investors do not have quarterly benchmarks to hit, and so can wait for better deals."
JohnCo doesn't like the choice set, either. "Is Coke really providing a bird in the hand? Price/trailing earnings is over 20. Price per seven-year average inflation-adjusted earnings (PE7) is closer to 25. The 2.6% yield is barely keeping up with inflation. Sure there's some hope for growth, but will the stock move at current starting prices to help you beat inflation, or will the slow growth of the company just help the stock 'grow' into a more reasonable P/E (that is, the E gradually gets bigger, but the P stays the same)? I guess I'll take Coke, but what an unappealing choice."
And even though I asked respondents to make an either-or choice, Wartybliggins noted that it's all about balance. "There's no question of choosing either Amazon or Coke," this poster wrote. "A strong portfolio would have both."
Upon closer scrutiny (and using some of Morningstar's tools), Nittwit found that both Amazon and Coke are already holdings. (And they may well be in your portfolio, too!) "[This exercise gave] me the opportunity to play with the X-Ray tool, Stock Intersection and question my dividend value stock investing philosophy and fund management choices. First, I own both. Coca-Cola is at 0.45% of my Morningstar-monitored holdings, it is held in two index funds and two actively managed funds. Amazon is at 0.52%, in two index funds and three actively managed funds. As a reference Apple is my largest holding at 1.81%, again two index funds and three actively managed. I have not purchased directly any of the three; they are the choice of the professionals I hire."
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.