Coca-Cola Stock: Dividend Growth Prospects Shrinking

Its beverage sales extend to more than 200 countries, and include sparkling soft drinks, water, sports drinks, juice, dairy, and even plant-based beverages.

The company has pushed into the tea and coffee space lately, with its 2019 acquisition of Costa Coffee. Expansion efforts also included Coke’s energy drink, which was supposed to compete with Monster Beverage (NASDAQ:MNST), as well as Red Bull.

Th energy drink endeavor was unsuccessful, with the company discontinuing the drink, though it hardly affected the beverage behemoth.

Because of its global presence, and diversified portfolio of iconic brands, Coca-Cola enjoys stable cash flows, which in turn have translated to quite consistent returns over the years.

Investors often praise the company’s prolonged shareholder capital return history, featuring 59 years of consecutive annual dividend increases. Coca-Cola, therefore, boasts the title of Dividend Aristocrat.

For this reason, income-oriented investors have historically enjoyed Coca-Cola’s reliable dividends. With the stock currently yielding around 3%, an above-average yield in the current ultra-low yield environment, Coca-Cola should continue to be rather attractive for conservative investors looking for low volatility and predictable total returns.

That being said, due to its limited growth prospects in terms of future income and dividends, I am neutral on the stock. (See KO stock charts on TipRanks)

Stable Business, Limited Growth Ahead

As mentioned, Coca-Cola’s global presence and diversified brand portfolio ensure multiple streams of cash flows.

Further, due to beverages being a consumer staple, the company’s sales have historically been unaffected by recessions. Coca-Cola has not posted a single unprofitable year since at least 1978, which is utterly impressive.

Hence, management has been able to dependably grow the dividend for decades.

However, Coca-Cola’s bottom-line stagnation and limited growth prospects are rather worrying. The company produces the same net income levels it did more than 10 years ago. Stock buybacks have certainly helped boost the per-share net income over the years, though not adequately.

As the company keeps raising its dividend year after year, while earnings remain stale, the payout ratio has reached worrying levels, now approaching 90%.

Dividends per share used to grow in the double digits prior to 2008, and in the mid-to-high single digits up until 2018, while the company’s latest hike was as low as 2.4%.

Does this mean Coca-Cola’s dividend is in danger?

Not really. The company could easily cut on speculative expansion expenses, slightly increase the prices in some of its beverages, and perform loads of financial engineering before discussions on the dividend’s safety are to even begin.

Still, as clearly displayed by the dividend hike deceleration, there are little to no prospects when it comes to Coca-Cola growing its capital returns.

Wall Street’s Take

Turning to Wall Street, Coca-Cola has a Moderate Buy consensus rating, based on nine Buys, six Holds, and zero Sells assigned in the past three months. At $62.13, the average KO price target implies 11.6% 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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