Updated April 30, 2021 by Bob Ciura
For superior long-term returns, investors should focus on high quality dividend growth stocks. This comes to mind when reviewing the Dividend Aristocrats, a select group of 65 companies in the S&P 500 index with at least 25 consecutive years of dividend increases.
We have created a free Excel list of all 65 Dividend Aristocrats along with relevant financial metrics such as P / E and dividend payout ratios.
You can download the full list by clicking the link below:
We review all 65 Dividend Aristocrats every year. The 2020 Dividend Aristocrats In Focus series continues with beverage giant The Coca-Cola Company (KO).
Coca-Cola is not only a dividend aristocrat, but also a dividend king. The Dividend Kings have increased their dividends for over 50 years in a row. You can see all of the dividend kings here.
Coca-Cola has a 3.1% dividend yield, which is significantly higher than the S&P 500’s average yield of 1.4%. In addition, Coca-Cola is likely to keep increasing its dividend every year.
But this is a difficult time for Coca-Cola. Consumer preferences are changing and soda consumption in the US continues to decline. With Coca-Cola’s earnings growth slowing, the stock appears to remain overvalued. However, it remains a high quality business with strong brands and an attractive dividend yield.
Additionally, it has diversified away from fizzy drinks in recent years, and those efforts have paid off. This article examines Coca-Cola’s investment prospects in detail.
coca– –Cola is the world’s largest beverage company, when it does not own or license more than 500 unique– –alcoholic brands. Since the company was founded in 1886 It has spread to more than 200 countries around the world. It currently has a market capitalization of $230thBillions, which makes it a mega-cap stock.
Its brands matter About 2 Billions of servings of beverages worldwide every day, produce approximately $ 36th Billion in annual sales. It also has 20 brands, each with annual sales of $ 1 billion or more.
The foam drinks portfolio includes the flagship of the Coca-Cola brand as well as other soda brands such as Diet Coke, Sprite, Fanta and more. The still drinks portfolio includes water, juices and ready-to-drink teas such as Dasani, Minute Maid, Vitamin Water and Honest Tea.
Source: Investor Presentation
Coca-Cola dominates sparkling soft drinks. The company seeks to maintain and even improve this dominant position through product additions to existing popular brands, including reduced and sugar-free versions of brands like Sprite and Fanta.
This is a challenging time for Coca-Cola. In developed countries like the United States, where soda consumption has been steadily declining for years, soda sales are slowing.
Falling soda consumption is a significant threat to the company. While Coca-Cola’s total volume certainly still depends on frothy beverages like soda, the company has made great efforts in recent years to move away from its core products as the long-term growth prospects for frothy beverages are not particularly inspiring. Coca-Cola has acquired several beverage brands in recent years.
Coca-Cola reported a profit for the first quarter on April 19, 2021. Global unit volume was flat in the quarter, but sales increased 5% year over year due to a 5% increase in concentrate sales. Adjusted earnings per share increased 8% for the quarter.
To get back to growth, Coca-Cola has invested heavily outside of soda in areas such as juices, teas, dairy and water to meet changing consumer preferences. Given the success of its growth initiatives, we continue to see favorable long-term growth prospects in Coca-Cola.
Part of the reason we like the stock is because it competes in an industry that continues to grow globally and goes beyond broad economic growth. This results in strong overall growth in the industry that Coca-Cola has certainly benefited from in recent years.
Additionally, the ready-to-drink category is sold through highly diversified channels and continues to have projected growth rates in the mid-single digits for both Coca-Cola and the industry. This is especially true for still drinks like tea and water. Coca-Cola’s long-standing strategy of turning away from fizzy drinks is due to this and is undoubtedly bearing fruit.
Coca-Cola continues to acquire brands to grow, including the unexpected acquisition of Costa, a UK-based coffee brand.
Source: Investor Presentation
This is certainly an out-of-the-box buy for a sparkling beverage giant, but Coca-Cola is doing everything it can to secure its future.
Finally, we continue to like the sale of the company’s bottling operations. This has resulted in some pretty noticeable sales declines over the years, but the end goal is higher margins. Not only will sales increase, but margins will continue to do so too.
With that in mind, in addition to the company’s extensive buyback program and productivity improvement efforts, we see earnings per share growing 4% annually over the next five years.
Competitive advantage and recession performance
Coca-Cola enjoys two distinct competitive advantages: its strong brand and its global size. According to ForbesCoca-Cola is the sixth largest brand in the world, valued at over $ 64 billion.
In addition, Coca-Cola has an unparalleled distribution network. It has the largest beverage distribution system in the world.
These benefits enable Coca-Cola to remain highly profitable even during recessions. The company did very well during the Great Recession:
- 2007 earnings per share of $ 1.29
- 2008 earnings per share of $ 1.51, up 17%
- 2009 earnings per share of $ 1.47 (down 3%)
- 2010 earnings per share of $ 1.75 (up 19%)
Coca-Cola not only survived the great recession, it thrived too. Coca-Cola increased earnings per share by 36% from 2007 to 2010. This shows the longevity and strength of Coca-Cola’s business model. The company’s dividend also looks very safe.
Coca-Cola continued its impressive results last year as the company remained highly profitable despite the US economy slipping into recession.
Valuation and expected return
We expect Coca-Cola to achieve adjusted earnings per share of $ 2.15 in 2021. On this basis, the Coca-Cola share is traded at a price-earnings-ratio of 25.1. This is above our fair value estimate of 22, which means the stock is slightly overvalued. A falling P / E multiple could lower the annual return by -2.6% over the next five years.
The stock will generate positive returns from future earnings per share growth (estimated at 4%) plus the dividend yield of 3.1%. Taken together, we expect a total annual return of 4.5% through 2026.
With the stock appearing to be significantly overvalued, the corresponding contraction in the valuation multiple is expected to reduce total return over the next five years. The overall bottom line is that we expect Coca-Cola stock to generate a decent, albeit unspectacular, shareholder return at its current share price.
Coca-Cola has made great strides in repositioning its portfolio to meet changing consumer preferences. It has built a large portfolio of juices and teas to appeal to a more health conscious consumer.
There is still more to be done to turn away from fizzy drinks, and we see significantly improved growth prospects from 2020 onwards.
We rate the stock as held as it is overvalued, but the stock remains a good choice for high income investors given its 3% + yield and long history of annual dividend increases. These traits make Coca-Cola a proven dividend aristocrat and a blue chip stock.
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