Coca-Cola Dividend – Slowing Or Growing?

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When you've been paying and raising your dividend as long as Coca-Cola (NYSE: KO) has, most people don't pay attention to the company's dividend growth. The company's dividend increases are expected much like death and taxes. However, companies are dynamic and change. The fact that Coca-Cola is one of the greatest dividend plays of all time can be summed up with one phrase, 50 years of dividend increases. While that's an amazing feat, can it continue? Even more important, can Coca-Cola afford their current payout? That's what we're here to find out.

Before we get to the dividend, let's look at the business. I'm sorry to say Coca-Cola is not the same company it was 10 or 15 years ago. For many years if you looked at analysts expectations of earnings growth, the number was consistently north of 12%. This number has been so ingrained in investors heads that they often make the comparison of the current P/E with historical P/E ratios. This is dangerous, though investors in the past have paid as much as 26 times earnings for Coca-Cola, that was when the company was growing faster. Today, the company is actually expected to increase earnings by just 7.97% over the next five years. While this is not bad, it's not the double-digit increases that used to be the norm. I've argued before that Coca-Cola could not only speed up their growth rate, but also increase their free cash flow by purchasing Monster Beverage (NASDAQ: MNST). Monster has an expected growth rate that is nearly twice Coca-Cola's. The company also generates 3 times the free cash flow from the same $1 of assets that Coca-Cola does. However, this deal is apparently off the table according to recent reports. For now we'll assume Coca-Cola doesn't make a big acquisition and see how the company is poised to handle its dividend going forward.

The first concern for any investor should be, can the company afford the dividend that they already pay? I've seen countless examples where investors get complacent and don't realize a dividend cut is coming until it's too late. Where Coca-Cola is concerned, the company appears to have plenty of free cash flow to handle its current payout. However, in the following chart you can see a concern popping up in the last year.

<img src="/media/images/user_93/ko-fcf-payout_large.jpg" />

As you can see, as the free cash flow payout ratio dropped between 2009 – 2010, then reversed course and jumped to an even higher point in 2011. Another disconcerting factor is in the last three years while net income increased 8.53% on average, operating cash flow trailed this growth, showing an average increase of 5.24%. 

So what's been happening with dividend growth? The company has been a relatively consistent performer, and in the last 10 years has increased the dividend by rates as low as under 7% and as high as nearly 14%. Look at the following chart:

<img src="/media/images/user_93/ko-dividend-growth_large.jpg" />

You can see that except for last year, where dividend growth picked up a bit, that the average rate of growth has slowed. In particular, the average rate of increase in the past four years is 7.64%. In the four years prior to this, the average rate of growth was 11.04%. What can investors expect in the future? 

Given analysts expectations of nearly 8% growth in EPS for the next few years, I would expect the trend of slower dividend growth to continue. If operating cash flow continues to trail EPS growth as it has, I would suggest that 5-8% dividend growth should be a reasonable expectation for Coca-Cola investors. This isn't the double-digit growth that some investors might have been used to, but this isn't the same size company that they owned several years ago. Coca-Cola is constantly introducing new products, but its fastest growing divisions are bottled water and energy drinks. As consumers have gotten more diverse with their drink selections, Coca-Cola is trying to keep up. In the 1980's the slogan used to be “Coke Is It!” Who knows, in the future it might be “Unleash The Beast”.  

MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company. Motley Fool newsletter services recommend Monster Beverage and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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