Why Coca-Cola Is a Dividend Investor’s Dream

Dividends provide income for investors in most market conditions, versus investing for stock price (or capital) appreciation. That’s why they’re often considered a safe haven, and remain a keystone in retirement portfolios. When there’s market volatility, they’re a great way to lock in stability.

There are different approaches to choosing dividend stocks, such as those that provide a high yield or offer a mix of income and growth. One of the best dividend stocks has always been Coca-Cola (NYSE:KO). That was even more apparent during the past year. Let’s see why.

An older man with his hands around a young boy who is drinking a bottle of cola.

Image source: Getty Images.

A long and strong dividend

Coca-Cola is a Dividend King, an elite appellation for a list of companies that have raised their dividends annually for more than 50 years — in Coke’s case, for 59 years.

Dividend Kings are typically large, old, and stable companies whose high-growth phase is over and which use their excess capital to return value to shareholders in the form of dividends and share buybacks. Coca-Cola is a classic example. It has the highest beverage sales of any company, with $33 billion in 2020. The ubiquitous red can means that growth opportunities are limited, but it also means cash keeps coming in. With its storied name and well-run operations, Coke is a prototypical cash machine.

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The company keeps its dividend yield high (at the current price, it yields 2.98%). It’s typically over 3%, but the upward stock movement means that while the dividend remains unchanged or even raised, the yield goes down. That said, its forward dividend yield at the current dividend growth rate stands at 3.04%. 

Totally committed

Coke’s management knows where its value lies, and it raised the dividend in 2020 despite a poor showing during the pandemic. Last year’s sales were down 11% year over year, and analysts were skeptical of Coke’s ability to continue paying the dividend. But even during the worst of it, the company said it was committed to the payout.

CEO James Quincey said in the third-quarter conference call, “We recognize the dividend is important to our investor base and continue to believe our long-term model can deliver the cash necessary to reinvest to grow the business while also supporting the dividend.” He said that the company would increase the dividend payout ratio to eventually reach 75% of free cash flow.

With that in mind, Coca-Cola increased the payout 2.4% in February 2021 to $0.42. The total 2021 annual dividend is $1.68 per share, up from $1.64 in 2020.

Growth is still happening

I mentioned above that the dividend yield is slightly lower than usual due to a rising share price. Coke stock gained 19% over the past year after tanking in the March 2020 crash, and it’s up slightly year to date. Investors have developed more confidence in the beverage giant’s future as sales rebound. 

Total revenue increased 5% in the 2021 first quarter, ended April 2, the company’s first increase since the pandemic started and sales fell off a cliff. As many economies begin to reopen, Coca-Cola is reaping the benefits. 

At-home sales performed well throughout, but the food service business, which generally accounts for about half the total, dropped as restaurants and businesses closed. Coke quickly shifted to meet demand were it was — at home — to lift the overall business. But a complete recovery is tied to economic recoveries, and the company demonstrated its strength in the first quarter as many economies began the road back.

As far as being mature, Coca-Cola still sees plenty of room for growth. It says it has 13% of the market in developed countries and 5% in underdeveloped markets, which represent 80% of the global population. While rival PepsiCo has been outdoing Coca-Cola in absolute sales as well as in sales growth for years, thanks to the former’s wider product offering apart from beverages, Coke’s stock has rebounded faster from the pandemic decreases indicating that the market seems to have more faith in Coca-Cola’s fundamentals.

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The company had a strong 2019 going into the pandemic, and is now working to get back to it former efficiency as economies recover across the globe. It shed hundreds of small brands in a 2020 restructuring to focus on and revitalize core brands. For example, Coke Zero Sugar’s volume increased 4% in 2020.

If the first-quarter showing is any indication, there’s still lots of potential for growth, making Coca-Cola stock a top dividend pick.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/06/03/why-pepsico-is-a-dividend-investors-dream/

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