- Coca-Cola is a premier dividend growth stock, with 51 years of consecutive dividend increases under its belt. In a few days, Coca-Cola will make it 52.
- Coca-Cola has grown its dividend by 8% compounded annually over the past five years, but I do not believe the 2015 dividend raise will reach this level.
- Coca-Cola's core fundamentals are really struggling right now, and not just because of currencies. Coca-Cola is having a hard time growing sparkling beverage case volumes.
- This article addresses Coca-Cola's dividend growth prospects, given its fundamental challenges.
The Coca-Cola Company (NYSE:KO ) released fourth-quarter and 2014 full-year earnings results on February 2. While the immediate market reaction was very positive, with shares up 4% at the open, Coca-Cola's underlying results were not very impressive. The company managed only a small increase in global case volumes last year, and just a few percentage points of revenue growth. The stock's rally after earnings looked more like a relief rally, that the results were not as bad as feared. But this is hardly a reason to be overly bullish.
Coca-Cola still lags behind close rival PepsiCo, Inc. (NYSE:PEP ) because of its concentrated business. While PepsiCo holds a diversified business across food and beverages, Coca-Cola is still almost entirely reliant on sparkling beverages like Coke and Diet Coke. Consumers continue to take a harsher view of soda, which puts a hard ceiling on Coca-Cola's growth.
Still, Coca-Cola remains a highly profitable business due to its world-class brand and strength of scale. The company generates a lot of cash, which it uses to pay shareholders an attractive dividend. Income investors are likely still attracted to Coca-Cola, and those investors are about to be rewarded with a dividend increase. Here's what to expect.
Low Growth Leaves A Lot To Be Desired
Last year, Coca-Cola's revenue and earnings per share declined 2% and 16%, respectively. To be fair, unfavorable currency fluctuations took a large bite out of Coca-Cola's results. However, even excluding the effects of currency, Coca-Cola struggled to produce growth. This is because of a fundamental problem with Coca-Cola's business, which is simply that soda isn't growing much. Global case volumes of Coca-Cola's sparkling beverages, which comprise the vast majority of its total business, grew by just 1% for the fourth quarter and the full year. The flagship Coca-Cola brand was flat for the year.
Coca-Cola's results compare poorly to its closest competitor, PepsiCo. PepsiCo is due to release fourth-quarter earnings later this month, but it has done much better relative to Coca-Cola. I've been consistently more bullish on PepsiCo than on Coca-Cola, which I detailed in my last article. PepsiCo's constant-currency revenue and earnings grew 3% and 11% in the third quarter. and management expects 9% constant-currency EPS growth
for the full year. The difference between Coca-Cola and PepsiCo is due largely to PepsiCo's food business, which is growing very strongly, particularly in the emerging markets.
PepsiCo's Latin America Foods division posted 9% organic revenue growth, along with 15% growth in constant-currency operating profit, last quarter. In addition, operating profit for Quaker North America rose 10%. PepsiCo is also thriving in the emerging markets. Organic revenue in PepsiCo's Asia, Middle East, and Africa segment rose 11% in the third quarter, thanks to 11% volume growth in snacks.
It's almost a sure thing that Coca-Cola will increase its dividend in time for its next payout. It's been a full year since Coca-Cola last increased its dividend, and the company typically raises the dividend this time of year. Coca-Cola has increased its dividend for 51 years in a row, and it will very likely make it 52 soon. But Coca-Cola's modest earnings growth last year puts a limit on how much investors will get.
Dividend Increase Coming, But Temper Your Expectations
As previously mentioned, Coca-Cola is still a strong cash generator, despite its low growth. Coca-Cola produced $8.2 billion of free cash flow last year. The company paid $5.3 billion of dividends in 2014, which means its free cash flow payout ratio stands at 64%. Typically, consumer goods companies keep their dividend payments around two-thirds of free cash flow. As you can see, Coca-Cola is already near that level, which underscores the challenge in continuing to raise dividends while underlying growth slows down.
It's also important to note that Coca-Cola itself expects just mid-single digit growth in comparable currency EPS in 2015. Management holds an uncertain outlook for the current year, stating:
"We continue to see 2015 as a transition year as the benefits from the announced initiatives will take time to materialize amidst an uncertain and volatile macroeconomic environment."
Because of this, I believe investors should curb their enthusiasm regarding the upcoming dividend increase. Over the past five years, Coca-Cola increased its dividend by 8% compounded annually, but given its fundamental challenges, I do not expect Coca-Cola's 2015 dividend increase to reach this level.
I expect Coca-Cola to raise its quarterly dividend to $0.32 per share. This would represent approximately 5% dividend growth, and would take the new effective yield to 3% at a $42.50 stock price. This would accomplish the goal of rewarding investors and keeping Coca-Cola's amazing dividend increase streak alive, while also maintaining a comfortable payout ratio, until underlying growth improves.
Disclosure: The author is long PEP. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.