Some of the world’s best investors stick to dividend portfolios. They know that a steady stream of income is a top wealth building strategy. And finding the best deals is key. So today, we’re going to review another one of the best dividend stocks around. Let’s take a look at Coca-Cola’s dividend history and safety.
Coca-Cola Business Overview
Coca-Cola (NYSE: KO) is a $199 billion dollar business. The company is based out of Atlanta, Georgia and it employs 86,200 people. Last year Coca-Cola pulled in $37 billion in sales and that works out to $432,000 per employee.
The company is a beverage giant and maintains a solid credit rating (A+) from the S&P. This allows Coca-Cola to issue cheap debt to expand operations and finance other initiatives.
In the last few years, Coca-Cola has acquired Costa Coffee, Moxie and a few other brands. The company has a big network to market these brands further. This should help push sales a little higher and result in more cashflows to pay shareholders…
Coca-Cola Dividend History
Coca-Cola paid investors $0.88 per share a decade ago. Over the last 10 years, the dividend has climbed to $1.60. That’s an 82% increase and you can see the annual changes below…
The compound annual growth is 6.2% over 10 years… but over the last year, the dividend climbed 2.6%. The slowdown in dividend growth isn’t a great sign. Although, Coca-Cola still might be a good income investment. Let’s take a look at the yield…
KO Current Dividend Yield vs. 10-Year Average
Coca-Cola’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital and we’ll look at that soon.
The dividend yield comes in at 3.54% and that’s above the 10-year average of 3.06%. The chart below shows the dividend yield over the last 10 years…
The higher yield shows that investors have bid down the company’s market value. That makes sense after the recent market drop. But if things continue to rebound, investors will see the yield drop again and capital gains climb. Generally, the dividend yield is mean reverting with changes in share price.
Dividend Safety Payout Ratio
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So a payout ratio of 60% would mean that every $1 Coca-Cola earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety… but accountants manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Coca-Cola payout ratio based on free cash flow over the last 10 years…
The ratio is fairly steady over the last 10 years and the trend is up. It was above 100% in 2017 and 2018. That’s not great but it has come back down to 81.3%. Still, this doesn’t give much wiggle room for Coca-Cola’s board of directors to raise the dividend.
Even with the higher payout ratio than 10 years ago, Coca-Cola is in a good position. With the long history of payouts, it’s unlikely to cut the dividend anytime soon. Coca-Cola is one of 20 top consumer staple stocks.
Coca-Cola’s dividend history is solid, along with the other consumer staple stocks. Although, that’s just the tip of the iceberg.
