Companies that hold top brands are often able to see consistent results through all stages of the economic cycle. This is especially true of consumer staple companies, as their products can remain in demand even in a recession.
This strength and consistency can translate to dividend growth. Of the many companies with long track records of dividend growth, few can touch the Coca-Cola Company’s (KO, Financial) nearly six decades of raising distributions.
Of course, current investors should be more concerned with the company’s ability to continue to pay and raise its dividend. This article will look at why I believe Coca-Cola’s dividend growth should continue for years to come.
Company background and results history
No other company sells more non-alcoholic beverages than Coca-Cola. The company has a portfolio of 500 brands and has operations in almost every country in the world. Coca-Cola’s reach is so large that its products are consumed an estimated 2 billion times per day. The company has a market leadership position that few peers can match.
Coca-Cola benefits from its incredibly strong brand recognition amongst consumers. The company has 20 brands that each produce annual revenue in excess of $1 billion. This includes the namesake Coca-Cola, but also other brands such as Diet Coke, Sprite, Minute Maid, Fanta, Powerade and Vitamin Water.
One headwind that Coca-Cola and the rest of the industry has faced is the changing of consumer tastes over the past decade or so. Consumers have become much more health conscious and have reduced their intake of products with added sugar and carbonation.
This has resulted in declines in the business as annual revenue has fallen from $48 billion in 2012 to $38.7 billion last year. Top-line results have declined 2.4% annually over this period.
There is some good news for Coca-Cola. Last year’s revenue total was it highest since 2016 and the five-year compound annual growth rate is just over 2%. Not exactly a high growth rate, but considerably better than the 10-year growth rate.
Bottom-line performance has been better. Net profit improved 1.3% annually over the last decade. Earnings per share grew at a slightly higher rate of 1.8%, thanks in part to a small reduction in the share count. Again, not an exciting set of figures, but not terrible considering the context. Recall that revenue fell by nearly $10 billion over the last decade, so the fact that both net profit and earnings per share even grew at all is a positive.
Coca-Cola has been able to realize net profit and earnings per share growth because of its ability to extract profit from revenue. Net profit margin improved an incredible 730 basis points from 2012 to 2021.
In an effort to overcome changing consumer tastes, Coca-Cola has placed a lot of emphasis on other areas of its business. This includes coffee, sports drinks, teas and water. These are areas where Coca-Cola already has a leading market share, but still has room to grow to reach a different set of customers than those that prefer carbonated beverages.
While long-term revenue growth is on a decline, the medium-term has seen a return to growth that was only interrupted by the Covid-19 pandemic. Past this headwind, Coca-Cola’s results have returned to the trajectory they were on prior to the pandemic.
The first quarter of 2022 was excellent as revenue grew 16.4% to $10.5 billion and adjusted earnings per share of 64 cents compared favorably to 55 cents in the prior-year period. Organic sales were higher by 18%, nearly twice what analysts had anticipated. Coca-Cola’s two-year stacked revenue growth is nearly 22%. The most recent quarter showed that the company’s products remain very much in demand.
Recession performance and dividend growth history
Coca-Cola has proven to be highly successful at remaining profitable during market downturns.
Listed below are the company’s earnings per share totals before, during and after the Great Recession:
- 2006 adjusted earnings per share: $1.19
- 2007 adjusted earnings per share: $1.29 (8.4% increase)
- 2008 adjusted earnings per share: $1.51 (17.1% increase)
- 2009 adjusted earnings per share: $1.47 (2.6% decrease)
- 2010 adjusted earnings per share: $1.75 (19% increase)
Coca-Cola initially saw solid growth during the period before adjusted earnings per share fell slightly in 2009. In total, the company’s adjusted earnings per share grew almost 14% for the 2007 to 2009 time period. And this was without the benefit of share repurchases as the share count remained largely the same during the period.
The company produced a new high for adjusted earnings per share the very next year and has largely seen slow and steady growth ever since.
The only significant decline was during 2020, when social distancing restrictions and closures of restaurants and sporting arenas kept a lid on results. Revenue, adjusted earnings per share and net profit fell 11.4%, 7.6% and 7.3%, respectively, in 2020. The company returned to growth in each area in 2021, speaking to the strength of Coca-Cola’s brands. Strength in challenging times is why Coca-Cola has increased its dividend for 59 consecutive years.
The company’s dividend has a CAGR of 5.7% over the last decade, but that pace has slowed to 3.2% since 2017. The trend has been that shareholders have seen a one cent per quarter raise over the last five years.
Shares of Coca-Cola yield 2.7%, which is below the 10-year average yield of 3.1%, but more than a full percentage point above the average yield of 1.6% for the S&P 500 Index.
Dividend payout ratios and the impact of debt
Coca-Cola’s growth streak is very long, but the company’s ability to continue to increase its dividend will depend on a number of factors, including dividend payout ratios.
Coca-Cola distributed dividends of $1.68 last year while generating adjusted earnings per share of $2.32 for a payout ratio of 72%. Shareholders should see $1.76 of dividends per share in 2022. Analysts surveyed by Yahoo Finance project that the company will earn $2.47, leading to an expected payout ratio of 71% for the year. These ratios are on the high side, but below the 10-year average of 80%.
Let’s also consider free cash flow. Coca-Cola has distributed $7.35 of dividends over the last four quarters while generating $10.2 billion of free cash flow for a payout ratio of 72%. This, again, is on the high side, but below the average free cash flow payout ratio of 80% since 2018.
Debt obligations should also be considered when evaluating a company. Coca-Cola had interest expense of $1.34 billion over the last year and total debt of $41.7 billion at the end of the first-quarter, giving the company a weighted average interest rate of 3.2%.
The image included below shows where Coca-Cola’s weighted average interest rate would need to reach before free cash flow wasn’t enough to cover dividend distributions.
Source: Author’s calculations
The weighted average interest rate would need to extend above 10.1% before dividends weren’t paid for by free cash flow.
Final thoughts
Coca-Cola has a long and storied history due to its enviable portfolio of leading brands. Changing consumer tastes has impacted the company, but top-line growth has returned over the last five years. Recent results have been strong as well.
The company’s dividend growth streak is approaching 60 years. The payout ratios are elevated, but lower than the averages. Debt is also manageable and unlikely to encumber future dividend increases.
A strong business model and the likelihood of future dividend growth suggest that Coca-Cola could be a solid option for investors looking for income from the consumer staple sector.
