- The beverage giant about to raise its dividend.
- The balance sheet has weakened a little.
- Its buyback was not as strong in 2014.
- Currencies are negatively impacting the results.
When investors think of the Coca-Cola Company (NYSE:KO ), one of the main items they look at is the dividend. The company has increased its dividend in each of the past 50 years, and investors are expecting to get another raise rather soon. Today, I'll preview the potential raise for this year, and detail why investors should prepare for a lower dividend increase in 2015.
Looking at the balance sheet:
When looking at a potential dividend raise, we must look at the company's balance sheet. Coca-Cola has decent financial flexibility, which has allowed the company to pay a solid dividend and buy back plenty of stock. In the table below, you can see some key balance sheet metrics at the end of the last couple of years. The most recent numbers can be found in the Q4 earnings report .
*Includes cash, cash equivalents, short-term investments, equity method investments, and other investments.
**Includes loans and notes payable, current maturities of long-term debt, and long-term debt.
While the company's cash balance has increased in recent years, that's mostly as a result of taking on a lot of debt. The balance sheet did get a little weaker in the past year, mostly as a result of the share repurchase plan. This isn't necessarily a bad thing, as we've seen many large cap balance sheets get worse in recent years thanks to sizable stock buybacks. At the moment, the company does not have any problems increasing the dividend or buying back stock. However, thanks to results being pressured due to currencies. the cash flow is not as good as it could have been. In 2014, cash from operations was up less than 1%. That's one reason why I expect a smaller raise this year.
Reduction in the share count:
One thing that is important to a dividend raise is the share count. With the company buying back stock and lowering its outstanding share count, it could increase the dividend each year, while still paying out the same amount in total dividends. Coca-Cola has usually done more than that, increasing the total amount of dollars paid as well. In the chart below, you can see the net share count at the end of the past four years, split-adjusted when necessary.
Last year, the net share count came down by 36 million, or about 82 basis points. Unfortunately, that trailed the decline of the past two years - 67 million shares in 2013 (150 basis points) and 57 million shares in 2012 (126 basis points). This is another reason why I don't think we will see as much of a raise this year, as the share count did not come down as fast as the last two years.
Looking back at past years:
It was about this time last year where we got a solid dividend raise from the company. The increase was nearly 9%, putting the quarterly dividend at $0.305, or $1.22 per year. You can see in the chart below how this has resulted in a tremendous overall increase in the split-adjusted dividend in the past decade.
In 2006, the split-adjusted dividend was $0.155 per quarter. If Coca-Cola
were to raise the dividend by just half a penny per quarter to $0.31, that would be a doubling from 2006. I expect the dividend to be raised a bit more than that, but I just wanted to point out that math. The last six raises have all been between 6.82% and 9.80%, so investors are probably expecting something in that range.
Where the dividend stands currently:
Investors want to know how Coca-Cola's yield currently stands against other peers. In the table below, I've compared the company's dividend against Pepsico (NYSE:PEP ) and Dr Pepper Snapple (NYSE:DPS ) as of Friday's close.
At the moment, Coca-Cola has the highest yield, more than 25 basis points ahead of second-placed Pepsico. Interestingly enough, the yield from Pepsico is about equal to that of the US 30-Year Treasury bond. So at the moment, Coca-Cola offers a bit more than fixed income.
What a raise could look like:
Because of the pressures the company is facing from currencies, the results will be negatively impacted this year. Add in the weakening balance sheet and lower decline in the share count, and I'm guessing the dividend raise will be a little lighter this year than last. In the table below, you can see what a potential raise could look like in terms of raise in cents, percentage raise, new annual total, and yield based on Friday's close. The yellow area is where I think things will land.
I think that a two or a two and a half cent raise per quarter is the most likely. That would still be a solid raise, although the percentage would be less than what we saw last year. It would surprise me a lot if we saw something outside of the range in yellow I showed above. At the moment, any raise within the yellow area would get the dividend back above 3.00% on an annual basis. Should the stock decline before the declaration, it is possible that an even smaller raise could get to that key dividend yield level.
We are approaching the 2015 dividend raise for Coca-Cola. The beverage giant is in solid financial shape, although the balance sheet has weakened slightly in the past year. Overall results are being pressured by currency movements, something most large caps are dealing with. Also, the share count did not come down as much in 2014 as in the previous two years. As a result, I don't think investors should expect as much of a raise this year. I still believe that the increased amount will get the annual yield back over 3.00%, and that should please investors.
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