Dividend Aristocrats In Focus: Coca-Cola

Up to date on April thirtieth, 2021 by Bob Ciura

For superior long-term returns, traders ought to give attention to high-quality dividend progress shares. This involves thoughts when reviewing the Dividend Aristocrats, a choose group of 65 firms within the S&P 500 Index with no less than 25 consecutive years of dividend will increase.

We have now created a free Excel listing of all 65 Dividend Aristocrats, together with related monetary metrics comparable to P/E ratios and dividend payout ratios.

You’ll be able to obtain the total listing by clicking on the hyperlink under:

We evaluation all 65 Dividend Aristocrats annually. The 2020 Dividend Aristocrats In Focus sequence continues with beverage big The Coca-Cola Firm (KO).

Not solely is Coca-Cola a Dividend Aristocrat, it’s a Dividend King as properly. The Dividend Kings have elevated their dividends for 50+ consecutive years. You’ll be able to see all of the Dividend Kings right here.

Coca-Cola has a dividend yield of three.1%, which is significantly greater than the S&P 500 common yield of 1.4%. As well as, Coca-Cola is prone to proceed elevating its dividend annually.

However it is a troublesome time for Coca-Cola. Shopper preferences are altering, and soda consumption continues to wane within the U.S. As a result of Coca-Cola’s earnings progress has slowed, the inventory continues to look overvalued. Nonetheless, it stays a high-quality enterprise with robust manufacturers, and a horny dividend yield.

As well as, it has been diversifying away from glowing drinks lately and people efforts have paid off. This text will look at Coca-Cola’s funding prospects intimately.

Enterprise Overview

Coca–Cola is the world’s largest beverage firm, because it owns or licenses greater than 500 distinctive non–alcoholic manufacturers. For the reason that firm’s founding in 1886, it has unfold to greater than 200 international locations worldwide. It at the moment has a market capitalization of $230 billion, making it a mega-cap inventory.

Its manufacturers account for about 2 billion servings of drinks worldwide every single day, producing roughly $36 billion in annual income. It additionally has 20 manufacturers that every generate $1 billion or extra in annual gross sales.

The glowing beverage portfolio contains the flagship Coca-Cola model, in addition to different soda manufacturers like Eating regimen Coke, Sprite, Fanta, and extra. The nonetheless beverage portfolio contains water, juices, and ready-to-drink teas, comparable to Dasani, Minute Maid, Vitamin Water, and Trustworthy Tea.

Supply: Investor Presentation

Coca-Cola dominates glowing delicate drinks. The corporate is making an attempt to keep up and even enhance this dominant place with product extensions of current common manufacturers, together with decreased and zero-sugar variations of manufacturers like Sprite and Fanta.

It is a difficult time for Coca-Cola. Gross sales of soda are slowing down in developed markets just like the U.S., the place soda consumption has steadily declined for years.

Declining soda consumption is a major menace for the corporate. Whereas Coca-Cola’s complete volumes actually nonetheless rely on glowing drinks comparable to soda, the corporate has gone to nice lengths lately to diversify away from its core merchandise, understanding that the long-term progress prospect for glowing drinks isn’t notably inspiring. Coca-Cola has acquired a number of nonetheless beverage manufacturers lately.

Coca-Cola reported 2021 first-quarter earnings on April nineteenth. International unit case quantity was flat for the quarter, however income elevated 5% year-over-year, pushed by 5% progress in focus gross sales. Adjusted earnings-per-share elevated 8% for the quarter.

Progress Prospects

In an effort to return to progress, Coca-Cola has invested closely outdoors of soda, in areas like juices, teas, dairy, and water, to attraction to altering client preferences. As a result of success of its progress initiatives, we proceed to see Coca-Cola as having a positive long-term progress outlook.

One purpose we just like the inventory is as a result of it competes in an trade that continues to develop globally in extra of the speed of broad financial progress. This results in robust ranges of general progress within the trade, which Coca-Cola has actually been capitalizing on lately.

As well as, the ready-to-drink class is bought by way of highly-diversified channels and continues to have mid-single digit projected progress charges, each for Coca-Cola and the trade. That is notably true for nonetheless drinks like tea and water. Coca-Cola’s years-old technique to diversify away from glowing drinks is because of this and it’s undoubtedly bearing fruit.

Coca-Cola additionally continues to accumulate manufacturers so as to develop, together with its sudden acquisition of Costa, a espresso model primarily based within the UK.

Supply: Investor Presentation

That is actually an out-of-the-box purchase for a glowing beverage behemoth, however Coca-Cola is doing what it takes to safe its future.

Lastly, we proceed to love the divestiture of the corporate’s bottling operations. This has resulted in some fairly vital income declines through the years, however the finish aim is greater margins. Not solely will income transfer greater, however margins will proceed to take action as properly.

Taking all of this under consideration, along with the corporate’s ample buyback program and productiveness enchancment efforts, we see complete earnings-per-share progress of 4% yearly over the following 5 years.

Aggressive Benefits & Recession Efficiency

Coca-Cola enjoys two distinct aggressive benefits, that are its robust model and world scale. In keeping with Forbes, Coca-Cola is the sixth-most beneficial model on this planet, value over $64 billion.

As well as, Coca-Cola has an unparalleled distribution community. It has the most important beverage distribution system on this planet.

These benefits permit Coca-Cola to stay extremely worthwhile, even throughout recessions. The corporate held up very properly throughout the Nice Recession:

• 2007 earnings-per-share of $1.29
• 2008 earnings-per-share of $1.51 (17% enhance)
• 2009 earnings-per-share of $1.47 (3% decline)
• 2010 earnings-per-share of $1.75 (19% enhance)

Not solely did Coca-Cola survive the Nice Recession, it thrived. Coca-Cola grew earnings-per-share by 36% from 2007-2010. This reveals the sturdiness and energy of Coca-Cola’s enterprise mannequin. The corporate’s dividend additionally seems very secure.

Coca-Cola continued its spectacular outcomes final yr, when the corporate remained extremely worthwhile regardless that the U.S. financial system swung to recession.

Valuation & Anticipated Returns

We anticipate Coca-Cola to generate adjusted EPS of $2.15 for 2021. Based mostly on this, Coca-Cola inventory trades for a price-to-earnings ratio of 25.1. That is above our truthful worth estimate of twenty-two, which implies the inventory is barely overvalued. A declining P/E a number of may scale back annual returns by -2.6% over the following 5 years.

The inventory will generate constructive returns by way of future earnings-per-share progress (estimated at 4%) plus the three.1% dividend yield. Placing all of this collectively, we anticipate complete annualized returns of 4.5% by way of 2026.

As a result of the inventory seems to be considerably overvalued, the corresponding contraction of the valuation a number of is anticipated to scale back complete returns over the following 5 years. The general result’s that we anticipate Coca-Cola inventory to generate first rate, albeit unspectacular, shareholder returns on the present share value.

Last Ideas

Coca-Cola has made nice strides repositioning its portfolio to fulfill altering client tastes. It has constructed a big portfolio of juices and teas, to cater to a extra health-conscious client.

There’s extra work to be finished to diversify away from glowing drinks, and we see much-improved progress prospects starting in 2020.

We price the inventory a maintain since it’s overvalued, however the inventory stays a robust alternative for revenue traders attributable to its 3%+ yield and lengthy historical past of annual dividend will increase. These qualities make Coca-Cola a time-tested Dividend Aristocrat, and a blue chip inventory.