The Coca-Cola Company raised the dividend again for the 58th consecutive year. The quarterly payout was raised by 2.5% to $0.41 per share. The new dividend is payable on April 1st to shareholders of record on March 16th. The forward dividend is now $1.64 per share giving a yield of approximately 2.73% at today’s stock price. One could have gotten over a 3% yield until early-2019. But the stock price has run up as Coca-Cola (KO) has improved operational execution and optimism from the Costa Coffee acquisition. Arguably, the new CEO, who took the reins in mid-2017 has refocused the company on growth with an emphasis on coffee. But still, the current yield is decent at over roughly 2.7%, which is a full point greater than that of the S&P 500’s dividend yield. Furthermore, Coca-Cola is a Dividend King, Dividend Aristocrat, and Dividend Champion. Its status as a Dividend King puts it in an exclusive membership of only 29 companies that have raised the Dividend for 50+ straight years. This is no easy task. One has to consider that there are roughly 4,300 publicly traded U.S. companies. This combined with the relative safety of the dividend and competitive advantages for Coca-Cola make it one of my favorite dividend growth stocks.
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Overview of Coca-Cola
Coca-Cola is the largest non-alcoholic beverage company in the world that traces its roots back to 1886. it is also one of the largest consumer staples companies in the U.S. and world. The company makes and sells sparkling soft drinks, water, enhanced water, sports drinks juice, dairy, plant–based beverages, teas, coffees, and energy drinks. It has a market presence in most of the world and has operations in over 200 countries. The company’s brands are very well known. Coca-Cola owns many leading brands including Coke, Diet Coke, Sprite, Minute Maid, Fanta, PowerAde, Schweppes, Dasani, Gold Peak, Honest Tea, and many others. The company sells its beverages through a network of company-owned, company-controlled, affiliated, or independent bottlers, distributors, wholesalers, and retailers worldwide. Total revenue was $37,266 million in 2019.
Selected Data for Coca-Cola
|P/E Ratio (FWD)||26.7|
Coca-Cola Dividend and Safety
Coca-Cola’s forward dividend is now $1.64. The dividend safety metrics are not great but they are improving due to earnings growth and a low dividend growth rate. Consensus 2020 earnings per share is $2.26 giving a payout ratio of roughly 73%. I prefer dividend growth stocks with a payout ratio of 65% or below. Higher ratios tend to mean that future dividend growth rate will be low. Furthermore, if the payout ratio is too high or even over 100% then the dividend may not be safe. Even though the payout ratio is high, I am currently not too concerned about the dividend safety due to Coca-Cola’s stability of earnings.
The dividend is currently covered by free cash flow, but this metric could be better. Coca-Cola generates prodigious cash flow. In 2019, operating cash flow was $10,471M and capital expenditures were $2,054M giving free cash flow of $8,417M. The dividend required $6,845M giving a dividend-to-FCF ratio of ~80.8%. Granted this is over my threshold of 70%, but I am still OK with the ratio in this case due to Coca-Cola’s earnings stability and market dominance.
Coca-Cola’s debt has been creeping up over the years. Short-term debt stood at $15,247M and long-term debt was $27,516M at end of 2019. This was offset by $11,175M in cash, equivalents, and marketable securities. This is a reasonably conservative balance sheet and the company has an AA- debt rating from the Standard & Poor’s. Interest coverage is over 11X and the leverage ratio based on net debt is about 2.7X. These are decent values and at this point debt does not place the dividend at risk. However, I would like to see the leverage ratio come down below 2.5X.
Coca-Cola Competitive Advantages, Risks, and Moat
Coca-Cola essentially has a duopoly with its main competitor, Pepsi (PEP), which together control nearly 70% of the market. With that said, the barriers to entry are not too high for non-alcoholic beverages. The ingredients are simple. In fact there are many new entrants each year. But it is difficult to gain traction in the market. Distribution is largely controlled by Coca-Cola and Pepsi and also Keurig Dr. Pepper to a lesser degree. These companies have spent many years developing their distribution networks. This largely forces new entrants to partner with one of these three companies.
Furthermore, Coca-Cola has a large advertising budget spending over $4B in 2019 that keeps the company’s brands at the forefront of consumers. Lastly, the company has scale that is difficult to replicate resulting in low costs. The company’s brands are market leaders with Coke being the clear No. 1 in the US. Coca-Cola states that they are the No. 1 brand in sparkling soft drinks; juice, dairy & plant; hydration, tea & coffee; and energy. In the 2019 rankings of the World’s Most Valuable Brands Coca-Cola was No. 6 with a value of approximately $59.2B. The company is the highest ranked beverage company in the world. The combination of distribution, brand strength, and scale arguably gives Coca-Cola a wide moat.
Final Thoughts on Coca-Cola Dividend
Coca-Cola is an iconic American company with global operations. The business model works not only in the U.S. but also worldwide. Competition is tough. But there are really only two major players and hat is unlikely to change in the near future. The stock has generated solid returns for investors for many years in the past. Coca-Cola just raised the dividend again and will likely due so for years to come. At the right price, the stock is a buy in my opinion. But of course, Coca-Cola is trading at an elevated valuation and has been for may years due to the positive characteristics. Hence, one may want to wait for a better entry point or for adding to an existing position.
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Disclosure: I am long KO and PEP.
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