Innovative Partnerships
Coca-Cola is also expanding by partnering with businesses in key categories. The company partnered with Keurig to offer branded sparkling and still beverages on the company’s cold beverage dispenser.
In addition, Coca-Cola will release a hot Keurig Honest Tea product in the near future. The company’s partnership with Keurig opens up a new growth market for Coca-Cola.
Coca-Cola also partnered with Monster in a deal that transfers energy brands between the two companies and gives Monster access to Coca-Cola’s extensive distribution network. The move gives Coca-Cola a stake in Monster and its world class energy soda brand. Coca-Cola has had limited success in the energy category, and the move is a capital efficient way for Coca-Cola to better position itself to gain from the quickly growing energy beverage industry.
Fundamental Ranking of Coca-Cola
The Coca-Cola Co (NYSE:KO) has ranked as a Top 10 stock based on the 5 buy rules from the 8 Rules of Dividend Investing several times in the past 2 years.
The 8 Rules of Dividend Investing compare businesses with a long history of dividend growth to each other based on several quantitative rules that have historically improved long-term results.
Coca-Cola’s ranks relative to other high quality dividend stocks are shown below, along with why each rule is relevant.
Rule 1: Consecutive Years of Dividend Increases
Coca-Cola has increased its dividend payments for 54 consecutive years. This is one of the longest active streaks of any business. The company’s long dividend history shows it has the ability to grow profitably under a variety of economic, political, and competitive environments.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet
Rule 2: Dividend Yield
Coca-Cola has a dividend yield of 3.1%, which is the 55th highest out of 182 businesses with 25+ years of dividend payments without a reduction. Coca-Cola’s relatively high dividend yield should appeal to income oriented investors.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns
Rule 3: Payout Ratio
Coca-Cola has a payout ratio of 71%, which is the 150th lowest out of 182 businesses with 25+ years of dividend payments without a reduction. The company’s relatively high payout ratio is safe due to the exceptional stability of Coca-Cola’s cash flows and the low levels of capital expenditures needed to operate Coca-Cola.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Rule 4: Long-Term Growth Rate
Coca-Cola has managed to grow earnings-per-share at about 9% a year over the last decade. The company has the 72nd highest growth rate out of 182 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4
Rule 5: Long-Term Volatility
The company has a ten year price standard deviation of 18.6%, the 10th lowest out of 182 businesses with 25+ years of dividend payments without a reduction. Coca-Cola’s low volatility is due to its strong competitive advantage in a slow changing industry.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race
Final Thoughts
The Coca-Cola Co (NYSE:KO) is the gold standard in non-alcoholic beverage companies. Coca-Cola has significant growth potential ahead in developing markets, especially India and China.
The company’s long dividend streak makes it a Dividend Aristocrat and a Dividend King.
As consumer preferences slowly shift from sparkling to still beverages, Coca-Cola has positioned itself as the dominant still beverage company in the world.
Shareholders of Coca-Cola will likely be rewarded in the future with a double digit compound annual growth rate resulting from:
– Dividend yield of 3%
– Share repurchases
– Growing market share
– Tailwinds from growth in the overall beverage industry in the developing world.
Disclosure: None
