Dividend Aristocrats

Coca Cola Stock, a 58 Year Dividend Aristocrat

Coca Cola Stock is a member of the exclusive S&P 500 Dividend Aristocrats Index. The Dividend Aristocrats are 64 companies in the S&P 500 index that have consistently raised dividends every year for at least 25 years. They also have a minimum $3 billion market capitalization.

Coca Cola is one of those elite companies having paid and raised dividends for 58 years in a row. Management last raised its dividend from 40 cents a share in November 2019 to 41 cents a share in March 2020. This represents a 2.5% growth year over year.

In this article, we will review Coca Cola’s business operations, latest financial results, dividend growth history, long term stock performance and valuation as well as management guidance for 2020.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Coca Cola is the world’s largest non-alcoholic beverage company that owns over 500 brands grouped in to categories like sparkling soft drinks, water and enhanced water, energy drinks, tea & coffee and dairy/plant based beverages.

4 out of the top 5 beverages sold by Coca Cola are the top in the world as measured by sales. These include Coca Cola Classic, Diet Coke, Fanta and Sprite. These brands initially started selling in 1886 and are currently distributed in over 200 countries.

Coca Cola owns some of the world’s top brands and is #6 in Forbes’ list of the World’s Most Valuable Brands. Coca Cola’s brands are collectively worth $59.2 billion as of 2019.

69% of total revenues in 2019 came from sparkling soft drinks which include popular drinks like Coke, Diet Coke, Fanta, Fresca, Schweppes, Sprite and Zero Sugar products.

The next largest category is juice, dairy and plant based drinks including Minute Maid, Zico and Simply. Tea and Coffee and Water products also make up a sizable portion of total revenues, as displayed by this screenshot below.

Coca Cola’s business model operates on a franchise system. The company has 225 bottling partners who essentially do the “hard work” of manufacturing and distributing Coca Cola’s products to the end customer through 30 million customer outlets. Coca Cola just sells its secret “concentrate” to the bottlers.

Examples of customer outlets include grocery and convenience stores, restaurants, movie theaters, supermarkets, etc. According to the Coca Cola System, these bottlers serve a staggering 1.9 billion drinks every day.

Revenue Analysis and Share Buybacks

For full year 2019, Coca Cola generated $37.3 billion in revenues and earned $8.99 billion in consolidated net income, implying a net profit margin of 24.1%. Revenues grew at a healthy pace of 8.6% year over year from 2018’s revenues of $34.3 billion. Earnings per share grew a stunning 38.4%, from $1.51 per share in 2018 to $2.09 per share in 2019.

Over the last decade, Coca Cola’s revenues have been on a roller coaster ride. The company generated $35.119 billion in revenues in 2010 and peaked at $48 billion in 2013. Since then, revenues have dipped to $37.3 billion in 2019.

Trading on the New York Stock Exchange, Coca Cola is valued at $210.4 billion in market capitalization and pays a handsome dividend yield of 3.35%.

This yield is 125 basis points higher than the yield on the S&P 500 index at 2.1%.

Management’s new strategies have paid off according to this screenshot. Organic revenues grew 3% in 2017, 5% in 2018 and 6% in 2019. Free cash flow also hit a record high of $8.4 billion for 2019.

Management is moving more of the company’s core business to “Concentrate Operations” and away from bottling which is a capital intensive and low margin business. This has resulted in a decrease in revenues but a jump in margins and profitability.

Attached screenshot displays revenues by geographic area for 2019. North America is the company’s largest market accounting for 31% of total revenues.

This also means the company has a huge exposure globally to emerging markets including Asia Pacific at 14%, Latin America at 11%, Europe, Middle East and Africa at 18% while Bottling Investments accounted for 19% of total revenues.

In terms of share repurchases, the Board of Directors approved a 500 million share repurchase program in October 2012 valued at $18.9 billion.

The company issued another 150 million share repurchase program in February 2019 valuing the buyback at $6.5 billion.

Growth Outlook

In 4th Quarter 2019 earnings results, Coca Cola reported net revenues grew a stunning 16% to $9.1 billion with organic revenues growing 7% for the quarter. Concentrate sales grew 2% and price/mix grew 5%. Operating margin also improved to 23.9% this quarter, versus 23.% for the prior year quarter in 2018.

The company experienced growth in its product portfolio including sparkling drinks with legacy Coca Cola drinks growing 6% in retail value globally as management started offering innovative drinks like Coca-Cola Plus Coffee.

Coca Cola Zero Sugar also rose double digits in 2019 thanks to health conscious customers across the world who are consuming products with less sugar.

Management expects 5% organic revenue growth for 2020 and operating income growth of 8%. Earnings per Share is expected at $2.25 per share and free cash flow at $8 billion, which fully covers the dividend plus a low to mid single digit growth.

Management has also embarked on growth through acquisitions recently by acquiring Costa Coffee which is the world’s second largest coffee chain with over 4,000 retail locations and 10,000 coffee machines in Europe, Asia Pacific, Middle East and Africa.

The price paid for the acquisition was $5.1 billion. This will add $1.7 billion in revenues to Coca Cola’s financials and $312 million in Earnings Before Interest, Depreciation and Amortization (EBITDA).

Dividend Growth History

Coca Cola is a member of the exclusive Dividend Aristocrats Index, having paid and grown dividend payments for 58 years in a row. Not many companies have achieved this remarkable milestone.

Coca Cola has grown its dividend from just 10 cents a share in 1990 to $1.60 in 2019. This represents a compounded annual growth rate of 9.7% over 30 years.

Attached is a chart showing the steady uptrend in Coca Cola’s dividend growth. It would be hard to find another company with a growth chart as smooth as this one!

Chart below presents the % growth in Coca Cola’s dividend payments each year from 1989. Highest rates of growth occurred in 1993 at 22% and 2007 at 20%. During the great financial crisis from 2008 to 2010, growth rate slowed to mid single digits and has since slowed to low single digits in 2019.

Measuring the Dividend Payout Ratio

Lets calculate the the dividend payout ratio for Coca Cola Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, Coca Cola generated $10.5 billion in cash flows from operations and spent $2.1 billion in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $10.5 billion – $2.1 billion

FCF = $8.4 billion

For fiscal 2019, Coca Cola paid out a total $6.845 billion in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $6.845 / $8.4 billion

DPR = 81.5%

A dividend payout ratio of 81.5% is quite high for a mature company like Coca Cola. It is not a surprise therefore that the dividend growth rate explained above has slowed to low single digits, from as high as 10% in 2013.

Stock Valuation

Analysts expect Coca Cola to earn $2.01 in earnings per share for 2020. Using the current stock price of $49 and dividing in to the expected earnings, we get a forward price to earnings ratio of 24.4 times earnings. As a comparison, the S&P 500 currently trades at 17 times forward earnings.

Since Coca Cola is a member of the S&P Consumer Staples Index (XLP), it is regarded as a “safe stock” and during market volatility, investors turn to Staples and Utilities for their safe dividend yields.

Coca Cola stands out in this regard. Investors like the company’s 3.35% handsome dividend yield and are therefore paying a premium for the shares.

Long Term Performance

Coca Cola (KO) Stock has risen from just $1.60 in January 1985 to $49 as of April 2020. This represents a compounded annual growth rate (CAGR) of 10% over 35 years. This is quite a stellar performance for a mature enterprise like Coca Cola.

During the depths of the great financial crisis, Lowe’s Stock dropped from a high of $31 in November 2007 to as low as $20 in March 2009. This represented a 35% drop from peak to trough.

It is interesting to note that Coca Cola out performed S&P 500 during this period because the S&P 500 dropped as much as 56% while Coke only dropped 35%. Hence, this is an out performance of 21%!

Executive Summary

Here is what we like and don’t like about Coca Cola (KO) Stock.

Likes

  • 58 years of growing dividends making this a dividend aristocrat stock.
  • Nice dividend yield of 3.35%, 125 basis points higher than the S&P 500.
  • Management hungry to make smart acquisitions, product innovations and increase productivity through selective cost cutting.
  • $6.5 billion share repurchase program (150 million shares) announced in February 2019.

Dislikes

  • High dividend payout ratio of 82% and a slowing dividend growth rate of low single digits.
  • High forward price to earnings ratio of 24.3 times earnings while the broader market S&P 500 trades at just 17 times. Coca Cola Stock is quite expensive as investors pay a premium for its safety and moat business model.
Market Capitalization $210.4 Billion
Dividend Yield 3.35%
Forward PE Ratio 24.3 times 2021 earnings
Dividend Growth (5 Year Avg.) 5.3%
Dividend Payout Ratio 81.5%
EPS Growth (5 Year Avg.) 5.33%
2019 Revenues $37.3 Billion
Gross Margin 60.7%
Net Margin 24%

Coca Cola Stock Ex Dividend Dates

Source: Coca Cola Investor Relations

Coca Cola Stock Price

To see the latest Coca Cola Stock Price, visit the Investor Relations website and select “Stock Information.”

Warren Buffet’s Interview on Coca Cola

Here is an interview of Warren Buffet sharing his thoughts on owning 400 million Coca Cola shares, and never selling even one since 1988. When asked by Coca Cola CEO Muhtar Kent about what excites him in terms of business, technology and innovation, Warren says “I like this one” referring to Coca Cola. Mr. Buffet loves great brands and likes to hold them forever.

 

What's your reaction?

Excited
0
Happy
1
In Love
1
Not Sure
1
Silly
1

You may also like

1 Comment

  1. […] I would point out that the company does have an issue regarding its dividend payout. It has continuously increased its dividend since 1963. While that is a laudable feat, it also sets a precedent that the company must continue […]

Comments are closed.