Just think of what’s happened in the world since 1920.
We had World War II, Vietnam, Desert Storm, and 9/11.
There was massive inflation here in the US throughout the late ’70s and early ’80s. Of course, who can forget the Great Depression? The Dust Bowl? The Great Recession?
But guess what else happened?
For the last 97 years, The Coca-Cola Co. has been rewarding shareholders with a quarterly dividend.
Multiple wars on a global scale, massive economic setbacks, and agricultural disasters couldn’t stop them.
So I’d say the odds are pretty good that they’ll continue paying out a dividend for the next 97 years.
Even better, David Fish tracks Coca-Cola (along with 814 other stocks) on his Dividend Champions, Contenders, and Challengers list, which is a document that tracks stocks with at least five consecutive years of dividend raises.
And if you check out Coca-Cola’s track record you’ll find that the company has increased its quarterly dividend for 55 consecutive years.
That’s more than half a century of pay raises for shareholders!
This kind of consistency when it comes to increasing passive cash flow is exactly why I’m a shareholder in this company, as you can see in my real-life, real-money portfolio.
The Coca-Cola Co. (KO) is the world’s largest beverage company. They manufacture, market, and distribute non-alcoholic beverages and syrups to more than 200 countries worldwide. The company owns, markets, or licenses more than 500 brands, with 21 of these being $1 billion brands. The have ~3,900 products worldwide.
Their worldwide unit case volume geographic mix is very balanced: Europe, Middle East & Africa, 29%; Latin America, 28%; Asia Pacific, 23%; North America, 20%.
As you can see, the company is widely geographically diversified across markets, and this diversification should continue well into the future as distribution channels continue to build out into emerging markets that are still growing.
Emerging markets where volumes are still low provide great growth opportunities for Coca-Cola in terms of volume growth. Meanwhile, price increases are practically guaranteed to occur over the coming years, meaning the company is likely to be selling more products to more people at higher overall prices.
The great thing about Coca-Cola’s business model isn’t just its namesake beverage, which has done a lot of heavy lifting in terms of building a substantial moat around the company, but rather the fact that no matter what’s going in with the general economy, people still have to drink some kind of beverage.
And the odds are pretty good that no matter what you’re drinking, it’s a Coca-Cola product. They offer carbonated beverages, water, coffee, tea, sports drinks, and juices. As noted earlier, the company has approximately 3,900 products spread out across more than 200 countries.
Plus, many of these brands are absolutely monstrous, with more than 20 of them bringing in more than $1 billion in annual sales.
Just a few examples of some of their billion-dollar brands include: Coca-Cola, Powerade, Dasani, Sprite, Minute Maid, and viatminwater.
And it’s because of the ubiquity of their products that they’ve been so consistent and successful over the the long haul.
The company’s growth over the last decade has been a bit disappointing, but there are a number of headwinds that have coalesced against them: the refranchising of US bottlers, the strong dollar, and the continued larger shift away from sugary beverages.
That said, the enduring nature of their business model, bolstered by the fact that people are going to be drinking something every day, continues to provide for billions of dollars every year in sales and profit.
Revenue for the company is up from $28.857 billion to $41.863 billion between fiscal years 2007 and 2016. That’s a compound annual growth rate of 4.22%.
This is actually a really solid number, especially considering the impacts of the refranchising (bottling operations have moved from a largely company-owned system to one that is now largely handled by local and independent bottlers).
Meanwhile, earnings per share increased from $1.28 to $1.49 over the same period, which is a CAGR of 1.70%.
The aforementioned headwinds have impacted the business, and there is an argument to be made that the economic moat of the business isn’t as wide as it once was.
Still, a new CEO, the conclusion of the US bottling refranchising, a moderation in the dollar strength, cost-cutting initiatives, and the addition of a number of healthier options could all add up to a brighter future.
In fact, CFRA, a professional stock analysis firm, is calling for 7% compound annual growth in The Coca-Cola Co.’s EPS looking out over the next three years, which would be a nice acceleration off of what we see above.
As I previously mentioned, Coca-Cola’s track record for paying out dividends is about as impressive as they come.
They’ve been able to raise the dividend by an average of 8.5% per year for the past 10 years.
I’d say the odds of them increasing their dividend annually for the foreseeable future are quite good, although future dividend growth will highly likely not look like it has in the past. This is due to what’s a sky-high payout ratio (temporarily and artificially higher than it really is).
The payout ratio, at 141%, would seem to indicate that the company is going to cut its dividend imminently. That would be a big shock for what’s historically been a bulletproof dividend.
However, that’s looking at the quarterly dividend against TTM GAAP EPS. If we look at free cash flow last fiscal year, consumed a bit over 90% of the company’s free cash flow.
This is still not a great situation for the viability and growth of the dividend, which is why I noted that future dividend growth (at least over the near term) is highly unlikely to be anything like it has been (at least over the last decade).
But if future growth is able to accelerate off of mediocre number over the last few years, as is expected, the company should be able to deliver dividend increases in the low single digits over the foreseeable future.
You’re looking at a yield of 3.2% on shares today, which is attractive both in absolute terms (it’s a lot of income) and relative terms (it’s higher than both the broader market and the stock’s own five-year average yield).
What’s happened here, though, is that as the company’s growth has slowed, the stock’s yield has risen.
So it’s a stock that offers more income than it historically has, potentially at the expense of profit and dividend growth.
But that certainly isn’t the worst thing in the world.
This stock has been about as reliable and stable as they come in terms of dividend growth. That’s because of the business model.
I personally drink bottled water during my workout, and I generally consume my fair share of carbonated beverages with meals. More often than not, these are Coca-Cola products.
And the wonderful thing is that billions of people around the world find themselves in the same situation as me.
These great products have led to fantastic profitability.
Return on equity has averaged 25.91% over the last five years, while net margin has averaged 16.94% over this same time frame.
These are strong numbers, but I think it’s important to keep in mind that profitability has compressed somewhat noticeably over the last few years. The company will have to reverse this trend.
The balance sheet looks solid, but there’s been a deterioration here over the last five years.
The long-term debt/equity ratio is 1.29 and the interest coverage ratio is just over 12.
These numbers looked better even just three years ago. However, the business remains financially flexible, and the balance sheet isn’t particularly concerning at this time.
All in all, this business has been practically the “gold standard” for almost a century now. It’s not as strong as it once was, but there are few companies better positioned to capture a good chunk of increasing global population and prosperity than Coca-Cola.
But while this is a great company, risks are present.
Primarily, Coca-Cola operates in an intensely competitive industry.
In addition, there are increasing claims of health concerns that may be caused by the products that Coca-Cola manufactures. In response to these claims, the company has started to increase attention toward the sugar content within some of their products. 19 of their billion-dollar brands have a low- or no-calorie alternative or are low- or no-calorie.
And the company’s global footprint exposes it to numerous political, economic, and weather risks.
Shares in the company are trading hands for a price-to-earnings ratio of 43, but this P/E ratio is based off of EPS that is inaccurate due to recent adjustments.
Still, the forward P/E ratio is almost 23. And investors are paying significantly more for the company’s sales and cash flow than they have compared to recent respective historical averages. For example, the five-year P/S ratio is 3.9, but investors are now paying more than 5 times annual sales.
I valued shares using a dividend discount model analysis with a 10% discount rate (my desired rate of return) and a 6% long-term dividend growth rate.
This long-term dividend growth rate is arguably aggressive, but I’m giving this “gold standard” of a business the benefit of the doubt. Near-term dividend growth will likely be lower than this, but I think the company could make up for that over coming years. If CFRA’s prediction comes anywhere close to manifesting, there will be potential for Coca-Cola to grow its dividend in a sustainable manner in the mid-single-digits for years to come.
The DDM analysis gives me a fair value on shares of $39.22, which is unfavorable against the $45.83 the stock is priced at right now. I’d wait for shares to pull back closer to fair value before making a purchase.
Bottom line: The Coca-Cola Co. (KO) is a company that has been paying quarterly dividends for 97 years – and counting. And it’s a solid bet that they’ll not only continue paying those dividends, but also raise them annually. This is a company with over 500 brands, ~3,900 products, and 21 $1 billion brands. The refreshment they’ve been offering for more than a century should continue to spread throughout the world as emerging markets grow, distribution channels increase, and the world grows bigger, thirstier, and wealthier. As long as human beings need to drink liquid to survive, Coca-Cola should thrive.
— Jason Fieber
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