Why Should You Avoid These Great Companies Today?

Warning! Don’t buy The Coca-Cola Co (NYSE:KO) and two other top brands today because of a simple reason. Find out why.

| More on:
The Motley Fool

When people start building a stock portfolio, they tend to gravitate towards brands that they are familiar with–brands like The Coca-Cola Co (NYSE:KO), Procter & Gamble Co (NYSE:PG), and McDonald’s Corporation (NYSE:MCD).

These are top companies with strong brand recognition. However, even the greatest companies shouldn’t be bought anytime. Specifically, investors shouldn’t buy them when they’re too expensive.

Coca-Cola

At US$45, Coca-Cola trades at 22.7 times its earnings, which is expensive even for a top beverage company. Normally, it trades at about 20 times its earnings. So, it’s about 12% overvalued today.

Additionally, it has been expanding its payout ratio for the last few years. It’s paying out about 70% of its earnings, which are expected to grow 5% annually in the medium term. With a high payout ratio, Coca-Cola is likely to continue slowing down its dividend growth as it has since 2013.

However, it’s still phenomenal that Coca-Cola could potentially grow by 5% per year because it is a huge company with a market cap of almost US$194 billion. So, although it’s not a buy, it’s still a potential hold if you bought shares at a reasonable valuation.

If it dips under US$39 with a 3.6% yield, it’ll be time to load up the truck.

Procter & Gamble

Procter & Gamble sells its umbrella of household product brands in more than 180 countries and territories. However, at US$82.60, it trades at 22 times its earnings, which is a tad bit expensive.

Most importantly, the company is experiencing a multi-year transformation by selling half of its brands. Last year its earnings per share (EPS) fell 5%, and this year its earnings are anticipated to continue to decline.

After shedding its non-core brands, the giant company should be able to focus its efforts on its core brands for higher growth. The company has a market cap of more than $217 billion!

If it dips under $67 with a 4% yield, it’ll be time to buy.

McDonald’s

At US$129, McDonald’s trades at 24.8 times its earnings, which is simply too expensive for one of the world’s largest fast-food restaurant chains. Even though it’s expected to grow its EPS by 10% in the medium term at a rate faster than it has in the last four years, its share price rose too quickly. Now earnings need to catch up to the expensive multiple.

If the company performs as expected, its share price would probably go sideways. However, if it misses that 10% growth expectation, it will likely experience price dips.

If it dips to about US$92 for a 3.8% yield, it’ll be worth it to buy some shares.

Conclusion

If you buy expensive companies, they’re likely to underperform. So, even for the greatest brands in the world, only buy when they’re priced at reasonable valuations, and you can get a higher dividend yield to reduce your risk. And just because they aren’t buys today doesn’t mean they’re not holds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Procter & Gamble. The Motley Fool owns shares of Coca-Cola.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »