Published February 14th, 2017 by Bob Ciura
The Coca-Cola Company (KO) is one of the most legendary dividend stocks of all time. It has paid a dividend to shareholders for nearly a century.
Over this period, the company has operated through a number of challenges, including wars and recessions.
And yet, its dividend has stood the test of time. What’s more, Coca-Cola has increased its dividend for 54 years in a row.
With that kind of a dividend track record, Coca-Cola is one of just 19 Dividend Kings. The Dividend Kings are a select group of companies with 50+ years of consecutive dividend increases.
You can see the entire list of Dividend Kings here.
Coca-Cola last increased its dividend on Feb. 18, 2016, which means another hike is right around the corner.
This article will discuss the previous year for Coca-Cola, and what investors should expect when the company announces its upcoming dividend increase.
Coca-Cola has a huge product portfolio, which are split into two categories: sparkling beverages and still beverages.
Source: 3Q Earnings Presentation, page 10
It has 20 brands that generate $1 billion or more in annual sales.
The sparkling beverage portfolio includes the flagship Coca-Cola brand, as well as other soda brands like Diet Coke, Sprite, Fanta, and more.
The still beverage portfolio includes water, juices, and ready-to-drink teas, such as Dasani, Minute Maid, Vitamin Water, and Honest Tea.
This is a challenging time for Coca-Cola. Soda consumption in the U.S. has fallen for more than a decade. In addition, the strong U.S. dollar has wreaked havoc on multinational companies like Coca-Cola.
This has caused significant headwinds for the company. In 2015, Coca-Cola’s total revenue and operating profits declined by 4% and 10%, respectively.
Conditions improved modestly in 2016, but the company still struggled. Revenue and operating profit fell by another 5% and 1%, respectively.
That being said, Coca-Cola’s results were dragged down by unfavorable currency markets, and the divestments of its bottlers.
Combined, these two factors shaved nine full percentage points off Coca-Cola’s revenue in 2016.
These issues have an impact, but are expected to be short-term in nature.
Coca-Cola’s organic revenue (which excludes currency) increased 3% in 2016. This is a better sign that the company’s core business is performing well.
Adjusted earnings-per-share, which excludes foreign exchange and restructuring expenses, increased 5% in 2016. Growth was due to price increases, volume growth, and share repurchases.
The difficulties presented by currency and divestments are expected to have a negative impact in 2017, and even 2018.
For 2017, Coca-Cola expects a massive 12%-13% revenue headwind from acquisitions, divestitures, and structural items.
Source: 4Q Earnings Presentation, page 12
Earnings-per-share are expected to decline 1%-4% in 2017.
The company projects a further 16%-17% revenue headwind from these items in 2018.
However, the company’s core operations should still see growth in 2017. Coca-Cola’s stills portfolio is arguably its most important growth catalyst.
Source: Investor Overview Presentation, page 32
The stills product portfolio represented 36% of Coca-Cola’s 2015 case volumes, up from 16% in 2000. Further growth is likely, as consumers are demanding more non-carbonated sodas.
The sparkling portfolio faces challenges from the decline in soda consumption. However, it remains a highly profitable business.
And, Coca-Cola still aims for growth in the sparkling business, even with a continued slowdown in demand.
Source: 4Q Earnings Presentation, page 10
Growth in the sparkling operation will revolve around smaller pack sizes and price increases.
Lastly, Coca-Cola has a compelling growth catalyst in the emerging markets, such as China and Latin America. Organic revenue increased 1% in Asia-Pacific last year, and 12% in Latin America.
Competitive Advantages & Recession Performance
Coca-Cola enjoys two distinct competitive advantages, which are its strong brand and global scale.
According to Forbes, Coca-Cola holds the fourth-most valuable brand in the world, worth approximately $58.5 billion.
And, Coca-Cola has a massive global distribution network. This provides for economies of scale, and the ability to cut costs when deemed necessary.
For example, Coca-Cola realized $600 million of productivity savings in 2016.
These qualities allow Coca-Cola to remain highly profitable, even during economic downturns. Coca-Cola’s earnings-per-share through the Great Recession are shown below:
- 2007 Earnings-per-share of $1.29
- 2008 Earnings-per-share of $1.51 (17% increase)
- 2009 Earnings-per-share of $1.47 (3% decline)
- 2010 Earnings-per-share of $1.75 (19% increase)
In a remarkable achievement, Coca-Cola grew earnings-per-share by 36% from 2007-2010. This shows the durability and power of Coca-Cola’s business model.
Coca-Cola reported adjusted earnings-per-share of $1.91 in 2016.
Meanwhile, Coca-Cola’s current annualized dividend is $1.40 per share. This means the company distributed 73% of its earnings-per-share in dividends last year.
This is a tight payout ratio. Since Coca-Cola does not expect earnings-per-share growth in 2017, this will likely affect its dividend growth rate.
As a result, it would be prudent for investors to expect a modest dividend hike this year. A 4%-6% dividend increase seems appropriate, given the company’s challenges and high payout ratio.
Still, Coca-Cola stock has an attractive 3.4% dividend yield. A 4%-6% hike would raise the dividend yield to approximately 3.5%-3.6%. These levels are well above the 2% average dividend yield in the S&P 500 Index.
And, Coca-Cola’s dividend is rock-solid.
Thanks to Coca-Cola’s strong brands, high margins, and global scale, the company is a cash-generating machine.
Even in a difficult year, Coca-Cola generated $6.5 billion of free cash flow in 2016.
This is more than enough cash flow to sustain its dividend and capital investing needs, repurchase shares, and raise the dividend modestly.
Coca-Cola is in the middle of a rough patch, due to unfavorable currency, a restructuring, and changing consumer preferences.
That being said, Coca-Cola has demonstrated a proven ability to navigate difficult environments.
Coca-Cola has one of the most impressive dividend histories of any stock. There are only 19 Dividend Kings, even with the recent inclusion of California Water Service Group (CWT).
Coca-Cola has been a member of the Dividend Kings list for several years already, and is likely to add to its streak very soon.
Expect at least a 4% dividend increase from Coca-Cola in the coming days.