The Coca-Cola Company (KO) has treated income-oriented investors well for a long time. Being the world’s largest nonalcoholic beverage corporation, it’s no wonder that many dividend investors find the stock attractive for its diversification and stable cash flows.
The company’s footprint expands across 200 countries and includes sparkling soft drinks, water, sports drinks, juice, dairy, and even plant-based beverages. Historically, the company’s global presence and diversified portfolio of well-known brands have resulted in stable cash flows and shareholder returns.
However, in my view, Coca-Cola does not presently showcase a worthwhile investment case, with the company failing to grow meaningfully and its dividend growth prospects shrinking. Hence, I remain neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
A Stagnated Business
Coca-Cola has had a growth problem for quite some time now. The most notable one was when the company launched its own energy drink to compete with Monster Beverage (MNST) and Red Bull, only to shorty discontinue it.
Overall growth in the company’s legacy brands has also been disappointing. While revenue growth rebounded in the company’s latest Q3 results to around 16% (mainly due to last year’s impacted results by the pandemic), Coca-Cola’s 5-year revenue growth remains at a disappointing -2.29%.
With a lagging top-line, profitability has also staggered. Coca-Cola’s 5-year EPS CAGR stands at 4.25%, with any growth primarily powered by stock buybacks.
Investors often celebrate the company’s lengthy shareholder capital return history, highlighting 59 years of sequential annual dividend increases. Coca-Cola, consequently, rightfully claims the title of Dividend Aristocrat.
While it’s understandable that many find comfort in Coca-Cola’s reliable dividends, in my view, the company’s DPS (dividend per share) growth potential has shrunk. Due to buybacks being the only driver to EPS growth over the past few years, the company’s continuous dividend increases are likely not as sustainable as they once were.
With growing dividends and a stagnated net income, Coca-Cola’s payout ratio currently stands at 101.7% of its last-twelve month net income, or around 75% of its expected income for next year.
DPS used to grow in the double digits before 2008. Growth then decelerated to mid-to-high single digits up until 2018. The company’s latest hike was as low as 2.4%, further continuing its downward trend.
On the bright side, the company could manage its costs, increase the prices of some of its beverages, and work on numerous strategies and financial engineering before worrying about the dividend’s safety. On the other hand, as prominently evidenced by the DPS growth deceleration, Coca-Cola has no meaningful prospects to grow its dividend at any rate that is notably higher than inflation.
The Valuation
Coca-Cola is trading at a forward P/E of 22.2. In my view, this is a steep multiple considering the company’s stagnated financials. From a yield perspective, the 3.13% could be juicy in the current low-yield environment.
Still, considering the lack of earnings growth to power a higher share price in the medium term, I would feel more comfortable buying Coca-Cola with a yield north of 4%.
Wall Street’s Take
Turning to Wall Street, Coca-Cola has a Moderate Buy consensus rating, based on five Buys and three Holds assigned in the past three months. At $61.50, the average Coca-Cola price target implies 15.2% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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