Coca Cola: A Dividend King With A Juicy Yield

The Coca Cola Company (ticker: KO) is a consumer staples sector beverage giant that produces and sells a huge amount of different drinks from categories such as carbonated soft drinks, water, juices, teas, etc.

Company Overview           

Coca Cola is, by market capitalization, the biggest company in the beverage industry. It owns more than 500 unique brands that it sells across the globe. Its most important products are from the carbonated soft drinks segment, but other business units, such as water and sports drinks, have grown into major revenue sources as well.

During Q2 Coca Cola was able to grow its organic revenues by 5% year over year. This growth was based on higher prices per unit as well as higher volumes, the underlying growth momentum therefore is compelling.

Growth Prospects       

Coca Cola has an excellent long-term growth track record. The company, which was founded roughly 130 years ago, has delivered excellent shareholder returns in the past. More recently Coca Cola’s earnings per share growth was relatively weak, though. This can be explained by the fact that Coca Cola reorganized its operations. The company has, for example, refranchised its US bottling businesses.

Since the refranchising is done, results will likely improve going forward. This is due to the fact that Coca Cola will not endure any one-time costs for refranchising and reorganizing any longer, and on top of that the refranchising allows Coca Cola to grow its margins significantly. During the most recent quarter Coca Cola was able to grow its operating margin by 300 base points year over year.

Coca Cola’s management forecasts earnings per share growth of 8%-10% for 2018. For a non-cyclical company from the consumer industry that is a highly attractive growth rate. This year’s profit growth will be impacted by tax rate changes, so beyond 2018 earnings per share growth will likely be somewhat lower than 8%. We forecast a long-term earnings per share growth rate of ~7%.

Valuation, Dividends, And Expected Returns

Coca Cola will earn about $2.10 during 2018. Based on the current share price of $46 shares are therefore trading at 21.9 times this year’s earnings right now. This is a bit expensive, as Coca Cola isn’t a high-growth company. We forecast some multiple compression over the coming years, as Coca Cola would be more fairly valued at a high-teens earnings multiple. If Coca-Cola’s price to earnings ratio declines to 18 over the coming five years, this will be a ~4% annual headwind to total returns.

Coca Cola has a very long dividend growth record. The company has raised its dividend for more than 50 years in a row. Right now Coca Cola’s shares yield 3.4%, which is almost twice as high as the broad market’s dividend yield. When we factor in the compelling dividend growth rate (8% annually over the last five years) Coca Cola looks like an attractive choice for income focused investors.

Through a combination of earnings per share growth of ~7%, partially offset by multiple compression, which will be a ~4% headwind, and its dividend yield of 3.4%, Coca Cola should be able to deliver total returns of 6%-7% over the coming years. This is not overly much, but for dividend investors that seek reliable income from a non-cyclical business Coca Cola could still be a good choice.

Final Thoughts

Coca Cola has not generated a lot of growth during the last couple of years. Due to its refranchising efforts the company should be able to benefit from higher margins and organic growth over the coming years, though.

Coca Cola will likely deliver mid-to-high-single-digits annual returns over the coming years. For investors that seek income from a low-risk & diversified company, Coca Cola could be the right choice.