Published by Bob Ciura on November 23rd, 2017
As the saying goes, slow and steady wins the race. This phrase comes to mind when reviewing the Dividend Aristocrats, a select group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
We review all 51 Dividend Aristocrats each year. The next stock in the series is beverage giant The Coca-Cola Company (KO).
Not only is Coca-Cola a Dividend Aristocrat, it is a Dividend King as well. The Dividend Kings have increased their dividends for 50+ consecutive years. You can see all 22 Dividend Kings here.
Coca-Cola has a dividend yield of 3.3%, which is well above the S&P 500 average yield of 2%. And, Coca-Cola is likely to continue raising its dividend each year.
But this is a difficult time for Coca-Cola. Consumer preferences are changing, and soda consumption is declining in the U.S.
Because Coca-Cola’s earnings growth has slowed, the stock does not appear to be undervalued. However, it remains a high-quality business with strong brands, and an attractive dividend yield.
Business Overview
Coca-Cola was founded in 1892. Today, it is the world’s largest beverage company. It owns or licenses more than 500 non-alcoholic beverages, including both sparkling and still beverages.
It now sells products in more than 200 countries around the world, and has 21 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.
Source: September 2017 Investor Presentation, page 9
Coca-Cola dominates sparkling soft drinks, where it commands over 50% market share.
This is a challenging time for Coca-Cola. Soda consumption in the U.S. has fallen for more than a decade. Declining soda consumption are a significant challenge for the company.
Approximately 72% of Coca-Cola’s worldwide case volumes consisted of sparkling beverages. These are carbonated drinks such as soda.
In 2016, Coca-Cola’s revenue and operating profit declined by 5% and 1%, respectively. The results are better after excluding currency exchange and impacts of restructuring expenses.
Coca-Cola’s organic revenue increased 3% last year, along with 5% adjusted earnings-per-share growth in 2016. Growth was due to price increases, volume growth, and share repurchases.
Conditions have tightened this year, as the company continues to work on re-positioning its portfolio for growth.
Growth Prospects
In an effort to return to growth, Coca-Cola has invested heavily outside of soda, in areas like juices, teas, dairy, and water, to appeal to changing consumer preferences.
The result is that the company has successfully grown organic revenue since its transformation began in 2014.
Source: September 2017 Investor Presentation, page 9
Coca-Cola grew core organic revenue by 4% in 2016, and the company is off to a good start in 2017 as well.
Organic revenue increased 2% over the first three quarters of 2017, driven by price increases. Earnings-per-share were flat in that time, as the company continues to invest to expand its product portfolio.
One of the strongest catalysts for Coca-Cola’s revenue growth is the international markets. For example, Latin America is performing well for Coca-Cola.
Source: September 2017 Investor Presentation, page 45
Coca-Cola has the #1 market share position in sparkling soft drinks, juice & dairy, and ready-to-drink coffee and tea.
Organic revenue increased 3% in Latin America over the first three quarters of 2017. There is room for continued growth in Latin America going forward.
Competitive Advantages & Recession Performance
Coca-Cola enjoys two distinct competitive advantages, which are its strong brand and global scale.
According to Forbes, Coca-Cola is the fifth-most valuable brand in the world. The Coca-Cola brand is worth $56 billion.
In addition, Coca-Cola has an unparalleled distribution network. It has the largest beverage distribution system in the world. Of the roughly 59 billion beverages consumed around the world every day, more than 1.9 billion come from Coca-Cola.
These qualities allow Coca-Cola to remain highly profitable, even during recessions. The company held up very well during the Great Recession:
- 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)
Not only did Coca-Cola survive the Great Recession, it thrived. Coca-Cola grew earnings-per-share by 36% from 2007-2010. This shows the durability and strength of Coca-Cola’s business model.
Valuation & Expected Returns
Coca-Cola expects adjusted earnings-per-share flat to down 2% from last year’s $1.91 per share. Assuming Coca-Cola keeps earnings steady at $1.91 per share, the stock trades for a price-to-earnings ratio of 24.
This is a premium of approximately 26% from Coca-Cola’s average price-to-earnings ratio of 19, over the past 10 years.
Source: Value Line
In fact, Coca-Cola’s valuation has not been this high since 2001-2002, which was soon followed by a prolonged period of significant multiple contraction.
This seems to indicate Coca-Cola stock is fairly valued, and perhaps slightly overvalued, given the company’s low-single digit earnings growth rate in recent years.
If Coca-Cola’s valuation multiple remains flat, the company can still produce positive returns for shareholders, through earnings growth and dividends.
A forecast of potential returns is as follows:
- 1%-3% organic revenue growth
- 0.5% margin expansion
- 2% share repurchases
- 3.3% dividend yield
Even with organic revenue growth stuck in the low-single digits, Coca-Cola could still generate returns of approximately 6%-9% per year, including dividends.
The dividend is secure, with room for modest growth. Coca-Cola has a current annual payout of $1.48 per share, which represents a payout ratio of 77% based on expected earnings-per-share for 2017.
Final Thoughts
Coca-Cola has made great strides repositioning its portfolio to meet changing consumer tastes. It has built a large portfolio of juices and teas, to cater to a more health-conscious consumer.
There is more work to be done, to diversify away from sodas. Momentum has slowed recently, but the company is still growing earnings and dividends each year.
Coca-Cola is one of 350 dividend-paying stocks in the consumer staples sector. You can see the full list of all 350 consumer staples dividend stocks here.
While the stock is not significantly undervalued, it is still a worthwhile holding for dividend growth.
