COCA-COLA | FUNDAMENTAL ANALYSIS ⭐️Coca-Cola shareholders are getting one of the highest dividends in Wall Street history. The corporation has been paying dividends for more than a century, and in 2021 it raised its annual payout for the 59th consecutive year. But AT&T just recently showed the market a severe hint that even companies with a long tradition of dividend increases can't guarantee that those regular raises will last forever.
So now is a good time for investors to take a closer look at Coca-Cola and estimate its ability to remain an outstanding company with a high dividend.
Coke's 2% dividend increase in February brought its annual payout to $1.68 per share. Those who buy the stock at the current price will get a yield of about 3.1%, more than double the current S&P 500 average yield of about 1.4%.
What's more, Coca-Cola, with more than 50 consecutive years of growth under its belt, is the Dividend King, a pretty rare title. Such a track record can lend additional confidence to income-oriented investors, as maintaining such momentum requires long-term balance sheet stability. Because of that, some rank Coca-Cola among the safest dividend stocks in the world.
Of course, dividend stocks cannot explicitly guarantee future payouts. Nevertheless, since a rejection of such a massive series would likely cause a detrimental loss of confidence in Coca-Cola stock, investors can feel a high degree of confidence that management will make continued payout growth a priority.
This beverage company's portfolio extends far beyond its flagship Coke brand and even soda. The company now owns about 200 brands, including such familiar names as Minute Maid orange juice, Honest Tea, Costa Coffee, and Topo Chico mineral water.
In 2020, the company introduced Topo Chico, low-alcohol carbonated water (hard-seltzer) in the Mexican and Brazilian markets, and earlier this year brought it to the United States. It's the company's first entry into the spirits market after a brief stint in the wine business 40 years ago.
Despite this broad range, however, investors have to look deeper to find the company's competitive advantages. Products such as water, tea, coffee, or juice can hardly be called unique. Nevertheless, Coca-Cola stands out largely because of the brand recognition it has built over many decades.
High spending on marketing around the world helps ensure this recognition. In addition, the fact that the company charges competitive prices for its products contributes to both recognition and loyalty.
Such advantages help the company generate the profits and free cash flow needed to pay dividends for decades to come. In 2020, Coca-Cola generated just under $8.7 billion in free cash flow when its payout was just over $7 billion.
However, the fact that 81% of the company's free cash flow now goes to dividends is cause for concern. Notably, that percentage has remained unchanged from 2019 levels. When cash flow declined because of the pandemic, Coca-Cola management cut spending on fixed assets by 43%. This kept the share of cash flow going to dividends the same.
In addition, current revenue and earnings trends do not bode well. Earnings are down 11% in 2020, and non-GAAP net income is down 6% as the company has cut operating expenses.
The pandemic-related foodservice closures were largely responsible for last year's decline in sales. However, Coca-Cola's revenue growth rate has long been in the single-digit percentage range, and the company is projecting only single-digit revenue growth in 2021, despite the projected economic recovery this year.
In addition, new investors will have to pay dearly for relatively sluggish growth. Over the past 10 years, Coca-Cola's stock price has risen only 62%, compared to a rise of more than 216% for the S&P 500. Yet despite this weak performance, the stock trades at 33 times earnings, exceeding the long-term historical averages for the S&P 500.
Although Coca-Cola generates above-average returns, potential new investors have good reason to hesitate. Dividend costs already leave Coca-Cola with little to invest in the business. Thus, investors should anticipate only humble payout increases. Furthermore, if the company fails to increase revenues significantly over the next few years, its dividend hike streak could be in jeopardy. With all this in mind, investors should look for higher-yielding stocks that can afford to cover their payouts.
