The Coca-Cola Company (KO) is a stock and brand that almost everyone knows. Coca-Cola is also a favorite of income and dividend growth investors since it is a Dividend King and a Dividend Aristocrat. As dividend stocks go, Coca-Cola is an exceptional one. The company is facing headwinds during COVID-19. Coca-Cola’s stock price fell along with the rest of the market, but it has not recovered all of its losses. The stock price is still down roughly 17% year-to-date, as of this writing. It is trading at forward earnings multiple of about 25X based on depressed consensus forward earnings estimates of $1.84 per share. Before the pandemic, the company guided for earnings of $2.25 per share. In a market that is arguably overvalued Coca-Cola may be a bargain. I view Coca-Cola as a long-term buy.
Overview of Coca-Cola
Coca-Cola traces its roots to 1886. It is the largest non-alcoholic beverage company in the world. Coca-Cola has operations in over 200 countries. The company makes and sells soft drinks, water, enhanced water, sports drinks, dairy, juices, teas, coffees, and energy drinks. Coca-Cola’s brands are extremely well-known. The leading brands include Coke, Diet Coke, Sprite, Minute Maid, Fanta, PowerAde, Schweppes, Dasani, Gold Peak, Honest Tea, and many others. Interbrand ranked Coca-Cola as the No. 5 global brand in 2019. The company sells its beverages through a network of company-owned, company-controlled, affiliated, or independent bottlers, distributors, wholesalers, and retailers worldwide. Companywide sales were $37,266 million in 2019.
Coca-Cola’s Market Dominance
Coca-Cola has the No. 1 or No. 2 market position in almost all its categories. Coca-Cola has the No. 1 market position in sparkling soft drinks; juice, dairy & plant; hydration; and tea & coffee. Coca-Cola is No. 2 in market share in energy drinks. The company’s main competitor is PepsiCo Inc (PEP). Together they control about 70% of the non-alcoholic beverage market.
The barriers to entry in the non-alcoholic beverage market are not that high, but it is difficult to gain scale and competition is fierce. The distribution networks are largely controlled by Coca-Cola, Pepsi, and also Keurig Dr. Pepper (KDP) to a lesser degree. Building a large distribution network to achieve scale is costly. This forces new entrants to partner with one of these three companies for distribution. This is even the case for larger competitors, such as Monster Beverage Corp (MNST), which has a distribution deal with Coca-Cola. The combination of market dominance and global distribution network give Coca-Cola a wide moat.
Risks for Coca-Cola
Coca-Cola is facing headwinds during COVID-19. Restaurants, bars, sports arenas, amusement parks and many other locations that sell Coca-Cola were closed for many weeks. Even now many of these locations are enforcing ‘social distancing’ requirements and are operating under restrictions. This is impacting sales. In April volumes were down approximately 25% globally. The bulk of the decline was from away from home sales. Volumes were again negative in May. Sales for at home consumption or retail have increased. But before the pandemic, about 50% of Coca-Cola’s products were consumed at restaurants. Coca-Cola will likely experience lower sales until away from home locations return to more ‘normal’ operating conditions.
Coca-Cola a Dividend King
As a dividend growth stock Coca-Cola is in a select crowd since it is a Dividend King. The company has raised the dividend for 58 consecutive years. Only nine companies have raised the dividend for a longer stretch of time. Coca-Cola pays an annual forward dividend of $1.64 and is yielding over 3.5% as of this writing. The current yield is almost double the ~1.8% offered by the S&P 500 index. The combination of a consistently rising dividend and decent yield should interest most investors seeking income or dividend growth.
Coca-Cola’s trailing dividend safety metrics have improved over the past few years. In 2019, the payout ratio was about 77%. The dividend is covered by free cash flow, but this metric could be better from the perspective of dividend safety. 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%.
Final Thoughts on Coca-Cola a Dividend King
Coca-Cola is facing headwinds from COVID-19. The most recent quarterly earnings release showed a 16% decline in global unit case volume resulting in a 28% decline in net operating revenues to $7,150 million. Earnings per share declined by a greater amount at 32% to $0.41 per share. It is likely that earnings and cashflow will remain depressed in 2020 and possibly even into 2021
However, as businesses reopen worldwide sales, earnings, and cash flow should recover. Coca-Cola is a Dividend King and Dividend Aristocrat. The company has wide moat, dominant brands, a solid yield, and a growing dividend. This should interest most investors seeking income and dividend growth.
Disclosure: I am long KO and PEP.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.