Coca-Cola (KO) has just been one of those companies. One that you recognize instantly when you see the brand and is all over the world. It has made a fortune for those who invested a long time ago, and those investors probably still have it today. A big attraction to owning Coke is the ability to continue growing and its healthy dividend. In this article I want to take a deeper look at the dividend and see if Coke still has the same ability to continue the payout.
First let's look at a 3-year chart, just to see where exactly Coke's share price has been. The chart will utilize the RSI and MACD measurements as well as three simple moving averages. We will use the 50-day, 100-day and 200-day simple moving average in an attempt to illustrate the overall trend. Below is the 3-year chart:
As you can see on the chart above, Coke has been in an upward trend for most of the previous three years. During that time, it has repeatedly tested its long-term support, the 200-day SMA. However, Coke has recently had trouble breaking the $38 level and has traded sideways for the last six months. Eventually, I expect Coke to recover and break out of this range to the upside, where it has a 52-week high around $40, made in August, the same month when the stock split 2-for-1.
Coke has paid a quarterly dividend for almost 100 years, since 1920. I honestly don't expect this to stop, ever. While we could look at the last 50 years -- or even more -- I'm only going to focus on the previous 10. Below I will look at the annual dividend in both chart and table form. Below is the dividend analysis for Coke:
There is a lot of information to take in from the previous sets of data. I will discuss each one in the order that it is presented. We will begin with the table. As you can see in the table above, the dividend payments over the last 10 years have both positives and negatives. On the positive side of things, Coke has raised the dividend each year, for the previous ten years. Another positive is the consistency. Shareholders don't love a ton of surprises, and there aren't many with Coke -- at least when discussing the dividend. But this is where the negative comes in, which is the consistently slowing dividend growth. The increases are nice to see, but as a shareholder, I would like to see more growth than in the past four years.
Looking at the first chart, we can see an extremely consistent payout. I think consistency is one of the most important things when looking for certain companies. When analyzing growth companies, we're more likely to find volatility and uncertainty. With fundamentally strong, matured companies, we find consistency. That's what we have with Coke, even if the payouts are lower than what we might want, I think the consistency is just as important.
Hopefully the two charts and the table have been able to illustrate the previous decade of dividend payments. The final charts display the percentage change from the previous year, over the past ten years. As you can see, from 2003-08 the dividend increased from 9.1% to 12%, annually. These are great increases and something current investors hope to see again because from 2009-present, Coke has yet to obtain an annual double digit increase, the highest being 8.5% in 2012.
So where do we go from here? I think Coke will continue to maintain the consistency it has in the last decade by constantly increasing the dividend. The company is a landmark, and will likely be around for as long as we can imagine. The company has paid a dividend for 92 years and I don't think this will change anytime soon. The reason being is that the payout ratio is only 51%.
The payout ratio is simple. It shows how much of the earnings per share the company pays out in the form of a dividend. The lower the ratio, the more secure the dividend. 51% would be considered low. If this figure was say 80% or 90% then I would consider the dividend at risk. The reasoning is simple. If the company were to take a huge hit in earnings, this would directly impact the dividend, as the company would not have enough cash to pay out the same lofty dividend as before (assuming it had a high payout ratio). With Coke only paying out 51% of its earnings in the form of a dividend, I know the dividend is safe and secure and capable of being raised in the future, especially as earnings increase.
Hopefully we can see the kind of increases that Coke paid out in the beginning of the millennium. More specifically, in the time frame of 2003-08, where it averaged a 10.5% annual increase in dividend payments. Though that averaged has dipped, it is still very acceptable and on the right track to being back in the double digits. Coke certainly can afford to pay out a higher dividend, especially if it raised the payout ratio. I know Coke will attempt to keep this relatively low however, as to make sure it never has to cut the dividend.
After the financial collapse in 2008, Coke has been hesitant in paying out too much in the form of a dividend. As global equity markets continue to improve, I think Coke will become more open to raising the dividend as well. I remain bullish and long on Coke, with the philosophy that the dividend will continue to increase over the coming years and decades.
Disclosure: I am long KO.