The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. This dividend king has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every for 55 years in a row. Warren Buffett’s Berkshire Hathaway (BRK.B) is the largest shareholder of the world’s largest beverage company.
The company’s last dividend increase was in February 2017 when the Board of Directors approved an 5.70% increase to 37 cents/share. Coca-Cola’s largest competitors include PepsiCo (PEP), Dr. Pepper Snapple (DPS) and Monster Beverage (MNST).
Over the past decade this dividend growth stock has delivered an annualized total return of 8.90% to its shareholders.
The company has managed to deliver a 3.30% annual increase in EPS since 2006. Analysts expect Coca-Cola to earn $1.92 per share in 2017 and $2.10 per share in 2018. In comparison Coca-Cola earned $1.49 /share in 2016. The figures for 2016 are depressed by one-time charges. I believe that the forward figures for 2017 are a better estimate for the true earnings power of the company to use in my analysis.
The company has managed to reduce the number of outstanding shares from 4.700 billion in 2006 to 4.345 billion in 2016.
Overall, I am not satisfied with the lack of earnings growth over the past four years. As a result, dividends have increased mostly through the expansion of the dividend payout ratio. This is not sustainable. Without further growth in earnings per share, I would be impossible to maintain the streak of annual dividend increases. The high valuation, and the lack of growth in earnings per share over the past four – five years do not bode well for an investment in Coke today.
The company’s return on equity has been on the decline over the past decade, falling from a high of 30.90 % in 2007 to a low of 27.60% in 2016. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 8.50% per year over the past decade, which is higher than to the growth in EPS.
An 8.50% growth in distributions translates into the dividend payment doubling every eight and a half years. If we look at historical data, going as far back as 1966 we see that Coca-Cola has managed to double its dividend almost every seven years on average.
The dividend payout ratio has increased gradually over the past decade. Using the earnings estimates for 2017, the forward payout ratio is a more reasonable but still high 77%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Coca-Cola is overvalued at 21.10 forward 2016 earnings, yields 3.60% with a high payout ratio. In comparison, PepsiCo (PEP) is trading at a P/E of 22.10 and yields 2.80%. Given the lack of earnings growth over the past four years, and the high valuation, I am not interested in adding to the stock. In the meantime, I am going to patiently hold on to my existing holdings, but reinvest the dividends elsewhere. If Coca-Cola cuts dividends, I will be out of the stock one second after the announcement.
Full Disclosure: Long KO, PEP and DPS
Relevant Articles:
- Dividend Kings List for 2017
- PepsiCo (PEP) is a dividend machine to hold forever
- Dividend Aristocrats for Dividend Growth and Total Returns
- The most important metric for dividend investing
Popular Posts
-
I review the list of dividend increases every week, as part of my monitoring process. This process helps me identify companies for further r...
-
I review the list of dividend increases every week, as part of my monitoring process . I usually focus my attention on the companies with a...
-
One of the most common questions I receive relates about the idea of how to invest a lump-sum amount. I believe that the answer is not a one...
-
A famous saying goes that there are two things certain in this world: death and taxes. While I am pretty sure I can’t escape death, I know t...
-
Charlie Munger is Warren Buffett’s business partner at Berkshire Hathaway. He is a successful lawyer, and investor, who was instrumental i...
-
Atmos Energy Corporation (ATO) engages in the regulated natural gas distribution, and pipeline and storage businesses in the United States. ...
-
Carlisle Companies Incorporated (CSL) operates as a diversified manufacturer of engineered products in the United States, Europe, Asia, Cana...
-
Paychex, Inc. (PAYX) provides payroll, human resource (HR), retirement, and insurance services for small to medium-sized businesses in the U...
-
A Health Savings Account is a tax-advantaged medical account which is available to individuals in the US who have enrolled into a high-deduc...
-
I review the list of dividend increases each week, as part of my monitoring process. There were 39 companies that increased dividends over t...