The Coca-Cola Company (NYSE: KO) Reports 3% With A Reasonable Rise
The Coca Cola Company NYSE: KO) is a staple stock for many yield-seeking investors. With decades of reliable payments, it’s no surprise that this is the longest hold in Warren Buffett’s portfolio.
Coca-Cola recently posted another positive quarter.
- Second quarter non-GAAP EPS of US $ 0.68 (US $ 0.12 beat)
- Revenue of US $ 10.1 billion (beat US $ 800 million)
- Organic growth in FY2021 revenue set at 12-14%
Following the positive results, Bank of America reiterated a buy rating, raising the target price to US $ 64 from an average rating of US $ 60.45, giving a potential upside of 12.5%.
Meanwhile, the company continues to transition to fewer brands, following a strategy of moving from 400 to 200 brands. By removing 200 brands, the company would only sacrifice 2% of volume sales and 1% of revenue, shifting resources to better opportunities. The company has set itself ambitious sustainable development goals, including 100% recyclable packaging by 2025 and net zero carbon by 2050.
While the stock has been somewhat slow over the past decade, lagging behind the consumer staples sector, its 3% dividend and sustainable innovation efforts provide fair compensation for the risk.
Click on the interactive chart for our full dividend analysis
Dividends are generally paid out of company profits. If a company pays more dividends than it has earned, then the dividend could become unsustainable – which is not an ideal situation. Therefore, we should always research whether a company can afford its dividend, measured as a percentage of its after-tax net income. Last year, Coca-Cola paid 88% of its profits in the form of dividends. However, this was an extraordinary situation where the company decided to push the payout ratio higher rather than breaking its stellar dividend record.
We update our data on Coca-Cola every 24 hours, so you can always get our latest analysis of its financial health here.
Volatility and dividend growth
Before buying a stock for income, we want to see if dividends have been stable in the past and if the company has a habit of maintaining its dividend. Coca-Cola has been paying dividends for a long time, 59 years to be precise.
For the past 10 years, the first annual payment was US $ 0.9 in 2011, compared to US $ 1.7 last year. This works out to a compound annual growth rate (CAGR) of around 6.7% per year over that time period.
Companies like this, increasing their dividend at a decent rate, can be valuable in the long run if the rate of growth can be sustained. Even with declining soft drink sales, we believe that the global reach, scale of production and willingness to expand into new areas like coffee, tea, sports drinks and even alcoholic beverages will contribute without no doubt to keep growth stable. Having a world class marketing machine also helps.
One thing to note is that Coca-Cola’s BPA has indeed been stable over the past five years. Fixed earnings per share are okay for a while, but in the long run the purchasing power of the company’s dividends could be eroded by inflation. Coca-Cola’s earnings per share have barely increased, which isn’t ideal – perhaps that’s why the company pays the majority of its profits to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often choose to pay a larger dividend instead. This is why many mature companies often have higher dividend yields.
Dividend investors are looking for a few key things:
- whether a company’s dividends are affordable
- whether there is a consistent payment history
- if the dividend is likely to grow
We believe that Coca-Cola pays an acceptable percentage of its cash flow and profits. Profits haven’t gone up, but we like the fact that dividend payouts have been relatively constant. While there are many better growth stories out there, it’s hard to match the stable returns that Coca-Cola offers at a reasonable price.
It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic policy. Meanwhile, despite the importance of dividend payments, they aren’t the only factors our readers should be aware of when valuing a business. For example, we have selected 1 warning sign for Coca-Cola that investors should consider.
Looking for more high yield dividend ideas? Try our curated list of dividend-paying stocks with a yield above 3%.
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Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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