Coca-Cola (KO) Dividend Stock Analysis

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is a member of the dividend aristocrat index and has increased distributions for 49 years in a row. The most recent dividend increase was in February, when the Board of Directors approved a 6.80% increase to 47 cents/share. The major competitors of Coca-Cola include PepsiCo (PEP), Nestle (NSRGY), Unilever (UL) and Dr Pepper Snapple Group (DPS).

Over the past decade this dividend stock has delivered an annualized total return of 3.30% to its loyal shareholders. One of the largest shareholders in the company is Warren Buffett’s Berkshire Hathaway (BRK.B).

The company has managed to deliver an impressive increase in EPS of 9% per year since 2001. Analysts expect Coca Cola to earn $3.88 per share in 2011 and $4.27 per share in 2012. This would be a nice increase from the $3.49/share the company earned in 2010. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time, as well as increases in volumes in emerging markets such as China. Coca-Cola is targeting 3%-4% growth in annual revenue and 6%-8% growth in annual operating income.

The acquisition of Vitaminwater in 2007 has increased growth in the company’s non-soda business, which is where Coke lags behind PepsiCo (PEP). The acquisition of CCE’s North American bottling business, should bring in sufficient cost savings for the company’s North American supply chain, which would result in increase in cash flows. The deal is expected to deliver approximately $350 million dollars in cost savings over the first four years of implementation. In addition to that, it will bring more control over North American operations, deliver more flexibility in the company’s strategy implementation and reduce conflicts over the product mix with bottlers.

The company’s high return on equity has been on the rise since hitting a bottom at 27.50% in 2008. 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 10.40% per year since 2001, which is higher than the growth in EPS.

A 10% growth in distributions translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1967, we see that Coca Cola has actually managed to double its dividend every seven years on average.

Over the past decade the dividend payout ratio has remained at or above 50% for a majority of the time. 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 trading at 18.40 times earnings, yields 2.90% and has a sustainable dividend payout. The stock meets my entry criteria, and I will look forward to adding to my existing position in it.

Full Disclosure: Long KO, PEP and NSRGY

Relevant Articles:

- PepsiCo (PEP) Dividend Stock Analysis

- Unilever (UL) Dividend Stock Analysis

- Diageo (DEO) Dividend Stock Analysis

- The case for dividend investing in retirement

Warren Buffett – A Closet Dividend Investor

Warren Buffett’s latest annual letter to Berkshire Hathaway (BRK.B) shareholders was published on Feb 26. The major theme of this letter was how to value Berkshire Hathaway as a company. Given the diverse nature of the company’s operations, this is no small task. Another important item that the Oracle of Omaha discussed was the dividend stream that flows to Berkshire on a regular basis.

In a previous article I outlined several reasons why Buffett is a dividend investor. While his investment style in the 1950s – 1970s was simply to purchase stocks trading at a discount to their fair values, it evolved into purchasing entire businesses or equity stakes in them. The common characteristic of these businesses was that they had strong competitive advantages, high returns on equity and as a result were generating excess cash flows. Buffett then used these excess cashflows to invest in other businesses, thus further compounding his capital base. Another characteristic common for Buffett’s stock investments is that most of them pay a dividend as evidenced by the largest positions for Berkshire Hathaway (BRK.B).

In addition to that Berkshire is expected to earn fat dividends from its investments in preferred stocks in General Electric (GE) and Goldman Sachs (GS) as well.

For the foreign based shares listed above I converted the amount of shares Berkshire Held at Dec 31, 2010 to the respective number of ADRs traded on US exchanges. For any currency translations I used the exchange rate as of Dec 31 as well.

Of particular importance are Buffett’s investments in Coca-Cola (KO), Procter & Gamble (PG) and The Washington Post (WPO), which was not listed above.

Buffett’s cost basis in Coca-Cola (KO) is $1.3 billion. At the current distributions rate he is essentially generating a yield on cost of 29%. This means that every three years he gets his initial investment back in the form of dividends alone. The majority of his position in the company was initiated between 1988 and 1989. Check my analysis of Coca-Cola (KO).

In Buffett’s words “Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

Buffett’s cost basis in Procter & Gamble (PG) is $464 million. He is generating a yield on cost of over 31% for his shareholders on this investment. The original investment in 1989 was made in Gillette preferred stock, which was converted into common stock in 1991. In 2005 Procter & Gamble (PG) acquired Gillette, which is how Buffett ended up with Procter & Gamble (PG) stock in the process. Check my analysis of Procter & Gamble.

Buffett’s basis in Washington Post (WPO) is $6.15/share. With a current dividend of $9.40, Berkshire’s yield on cost is 153%. The Oracle of Omaha began acquiring stock in the prominent newspaper group in 1973.

The lesson to be learned from these investments is to purchase great businesses at fair prices. These businesses should have a strong competitive advantage, pricing power and generate excess returns without requiring a lot of capital to grow.

Full Disclosure: Long PG, KO, JNJ, KFT, WMT

Relevant Articles:

- Buffett the dividend investor

- Seven dividend aristocrats that Buffett owns

- Warren Buffet - The richest investor in the World

- Buffett Partnership Letters

Dividend Stocks Showing Investors the money

Investors realize return on investment in the form of dividends, capital gains or a mix of both. Stocks that pay dividends typically deliver on average total long term returns that are characteristic of equities in general. The main characteristic that differentiates dividend paying stocks is that the dividend payment provides some stability in the total returns that investors are expected to receive in a given year. This lowers volatility and ensures that investors generate a relatively predictable return that could be used to fund retirement needs. Investors relying on dividends for their retirement income should also look at companies that regularly grow distributions, as a hedge against inflation.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company raised its quarterly dividends by 20.70% to 36.50 cents/share. This marked the 37th consecutive annual dividend increase for Wal-Mart. The ten year annual dividend growth rate is 17.80% for this dividend aristocrat. Yield: 2.80% (analysis)

Waste Management, Inc. (WM) provides integrated waste management services in North America. The company raised its quarterly dividends by 7.90% to 34 cents/share. This marked the Ninth consecutive annual dividend increase for the company. The five year annual dividend growth rate is 9.50% for this dividend stock. Yield: 3.70% (analysis)

WGL Holdings, Inc. (WGL) engages in the delivery and sale of natural gas, and provides energy-related products and services in the District of Columbia, Maryland, Virginia, and Delaware. The company raised its quarterly dividends by 2.60% to 38.75 cents/share. This marked the 35th consecutive annual dividend increase for the company. The ten year annual dividend growth rate is 2% for this dividend champion. Yield: 4%

The Gap, Inc. (GPS) operates as a specialty retailing company. The company raised its quarterly dividends by 12.50% to 11.25 cents/share. This marked the eight consecutive annual dividend increase for the company. Yield: 2%

National Interstate Corporation (NATL) , through its subsidiaries, operates as a specialty property and casualty insurance company in the United States, the District of Columbia, and the Cayman Islands. The company raised its quarterly dividends by 12.50% to 9 cents/share. This marked the seventh consecutive annual dividend increase for the company. Yield: 1.80%

The Hanover Insurance Group, Inc. (THG) , through its subsidiaries, underwrites personal and commercial property, and casualty insurance coverage in the United States. The company raised its quarterly dividends by 10% to 27.50 cents/share. This marked the seventh consecutive annual dividend increase for the company. Yield: 2.40%

General Dynamics Corporation (GD) provides business aviation; combat vehicles, weapons systems, and munitions; shipbuilding design and construction; and information systems, technologies, and services worldwide. The company raised its quarterly dividends by 11.90% to 47 cents/share. This marked the twentieth consecutive annual dividend increase for the company. Yield: 2.50%

Telephone and Data Systems, Inc. (TDS), through its subsidiaries, provides wireless and wireline telecommunications services in the United States. The company raised its quarterly dividends by 4.40% to 11.75 cents/share. This marked the 37th consecutive annual dividend increase for the company. Yield: 1.40%

Canadian Natural Resources Limited (CNQ) engages in the exploration, development, and production of crude oil and natural gas. The company raised its quarterly dividend by 20% to 9 cents/share. This international dividend achiever has boosted distributions since the year 2000. The stock currently yields only 0.80%.

The positive news is that Wal-Mart (WMT) is fitting my entry criteria after the increased dividend. Over the past decade the largest retailer in the US has increased revenues and profits, while its stock price has remained stagnant. The reason is that investors were too optimistic about Wal-Mart’s prospects in 1999-2000 and it wasn’t until recent years that the stock has become attractively priced. I would consider adding to my position in the stock as funds become available.

Full Disclosure: Long WMT

Relevant Articles:

- Twelve Dividend Stocks Growing Distributions
-Kimberly-Clark (KMB) Dividend Stock Analysis
- Dividend Growth Investing Gets No Respect
- My Entry Criteria for Dividend Stocks

PPG Industries (PPG) Dividend Stock Analysis

PPG Industries, Inc. (PPG) manufactures and supplies protective and decorative coatings. The company is a dividend aristocrat which has increased distributions for 39 years in a row.
Over the past decade this dividend stock has delivered an annualized total return of 9.60% to its loyal shareholders.

The company has managed to deliver a negative average increase in EPS of 6.10% per year since 2000. Analysts expect PPG Industries to earn $5.04 per share in 2010 and $5.68 per share in 2011. This would be a nice increase from the $2.03/share the company earned in 2009. The company’s net income is exposed to the cyclical nature of the company’s business, as it shrinks during downturns but rebounds sharply during upturns.


Few cyclical companies can afford to raise dividends for as long as PPG Industries has done so. Companies that come to mind include Nucor (NUE) and RPM International (RPM). The main risk with cyclical companies is that the dividend is at risk depending on the length and depth of each recession. Future management could decide to cut dividends during the next recession, as the distributions would look unsustainable. However, if they expect an upturn within a year or two, chances are that the dividend would be at least maintained.

The company’s return on equity has closely followed the volatility in earnings per share over the past decade. One could easily pinpoint the periods of economic downturn, which is when the ROE decreased –2001-2002 and 2008-2009 recessions. 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 3.20% per year since 2000, which is substantially higher than the growth in EPS. Despite the cyclicality of earnings, the company has managed to not only maintain but raise dividends consistently, which is not a minor accomplishment.

A 3% growth in distributions translates into the dividend payment doubling every 24 years. If we look at historical data, going as far back as 1973, we see that PPG Industries has actually managed to double its dividend every nine years on average.

Over the past decade the dividend payout ratio has increased from 45% to 105%. Based on estimated FY 2010 EPS of $5 however, the dividend looks adequately covered. 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 PPG Industries is close to being overvalued at 19.40 times earnings, yields 2.40% and has a sustainable dividend payout based off forward earnings. The cyclical business model and the valuation relative to other dividend companies make this company a hold at current prices according to my entry criteria.

Full Disclosure: Long NUE and RPM

Relevant Articles:

- How to select dividend stocks?
- How to invest in dividend stocks
- Ten Dividend Stocks Beating Inflation
- The case for dividend investing in retirement

My Entry Criteria for Dividend Stocks

There are thousands of stocks traded on US and international markets. If one were to analyze in detail all of these stocks it would probably take them a lifetime to accomplish this task. Luckily, dividend growth investors have several lists they could use to aide in the search for quality dividend stocks.

The first criterion that I use is that a company must have consistently raised distributions for at least ten years in a row. According to the dividend champions list, maintained by Dave Fish, there were 234 companies trading in the US which have managed to accomplish this. The reason behind requiring at least a decade of consistent dividend growth is to weed out all companies which are inconsistent in their dividend policies.

The second criterion includes removing companies which trade at a price/earnings ratio that is above 20. Even the best dividend paying companies such as Coca-Cola (KO) or Procter & Gamble (PG) are not worth buying at any price. In fact it could be argued that the reason behind the lackluster performance of the US Stock Market and many dividend stocks over the past decade is because they were grossly overvalued in the early 2000s. Despite the fact that many of these companies were able to substantially increase earnings and dividends over the past decade, these stocks are only now beginning to appear attractively valued. The only returns these shareholders were able to generate over the past decade were mostly from dividends.

The third criterion includes removing all stocks whose dividend payout ratio is higher than 60%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. Otherwise a high payout could show that the company cannot afford to pay the distribution and that the risk of a dividend cut is high.

Next, I want to look at earnings growth over the past decade, and dividend growth that exceeds inflation over the past decade.We want companies that grow earnings per share. This provides fuel for future dividend increases and increases the likelihood that the intrinsic value of the business grows over time.

After applying the set of criteria described above, the dividend investor should have a more manageable list for further research. While some investors also use dividend growth as another criterion, I typically want to only see it in the positive territory. The individual dividend growth is dependent on the type of company in the dividend yield and growth trade-off. After that I evaluate dividend growth prospects on a company by company basis. In addition, certain companies which pass-through most of their income to shareholders such as REITs and MLPs should be evaluated using a separate set of criteria that fits better with the type of business structure investors are analyzing.


It is important to remember that dividend investing should not be seen as a mechanical process. Investors should further analyze in detail the companies which their list generates and evaluate their competitive advantages, understand their business model and decide for themselves whether future dividend growth could be maintained.

Full Disclosure: Long PEP,PG,KO, WMT, MCD, CVX, CL

Relevant Articles:

- The ten year dividend growth requirement
- The Sweet Spot of Dividend Investing
- Buy and hold dividend investing is not dead
- The Future for Dividend Investors