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By Ahmed Ishtiaq

Coca-Cola (NYSE:KO) has more than 500 non-alcoholic brands, which the company is selling worldwide. The company primarily sells sparkling beverages; however, its portfolio of products is not limited to these beverages. Coca-Cola also sells water, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. Coca-Cola is one of the most widely recognizable brands in the world, and the company is mature. Like any other mature company, Coca-Cola pays a substantial percentage of its earnings to its shareholders in shape of cash dividends. Prospect of healthy income stream and stable growth makes Coca-Cola an ideal investment for income investors.

Dividend Profile

Coca-Cola has an impressive dividend profile. The company has a rich history of dividends and has increased dividend payment after regular intervals. At the moment, the company pays $1.02 in annual dividends, which represents a yield of 2.73%. Coca-Cola has a relatively high payout ratio of 59% based on its free cash flows. Over the past twelve months, the company paid $4.45 billion in cash dividends, and generated $7.54 billion in free cash flows.

Free cash flows have been fluctuating for the company over the past four years. As a result, payout ratio has also shown considerable volatility. However, the payout ratio is still manageable for the company due to strong free cash flows and market position. In order to assess the trend in free cash flows and some important metrics; I take a deeper look at the free cash flows of the company. It should help us identify a trend and future direction of the dividends.

Free Cash Flows

Free Cash Flows

TTM

2011

2010

2009

Net Income

$8,861

$8,634

$11,859

$6,906

Depreciation and other noncash charges

$2,000

$1,954

$1,443

$1,236

Funds from Operations (FFO)

$10,861

$10,588

$13,302

$8,142

change in noncash current assets

$165

$652

$2,360

$25

change in noncash current liabilities

$182

$462

$1,410

$19

Operating Cash flows

$10,514

$9,474

$9,532

$8,186

Capital Expenditures

$2,976

$2,920

$2,215

$1,993

Free Operating Cash Flow

$7,538

$6,554

$7,317

$6,193

Source: SEC filings

In the previous three years, the company has experienced some volatility in its net income. Especially in 2010 the net income went up substantially. The same pattern is evident in funds from operations of the company, and the end of 2010 FFO stood at $13.3 billion. The cash flows from operations stood at significantly improved levels in 2010 as compared to 2009. Coca-Cola also invests a substantial amount of capital in the business, and in the previous three years, the amount of capital expenditures has remained above $2 billion. At the end of 2009, the firm spent almost $2 billion in capital expenditures; however, by the end of 2011 the capital expenditures for Coca-Cola had gone up to $2.9 billion.

The company generates healthy free cash flows. Although, the capital expenditures have been increasing the firm has been able to post impressive free cash flows. In my previous free cash flow analysis articles, I only considered data up to 2011. However, for this article, I will be taking into account trailing twelve month data of the company. In the past twelve months, the company reported $8.8 billion in net income. Funds from operations and cash flows from operations have improved over the last year. Furthermore, capital expenditures have remained fairly stable, and free cash flows have gone up by almost $1 billion, compared to the figures reported at the end of 2011.

Essential Metrics

Essential Ratios

TTM

2011

2010

2009

Funds from Operations(FFO)/Total Debt

0.80

0.78

0.95

1.61

FFO/Capital spending requirements

3.65

3.63

6.01

4.09

Free Operating Cash Flow + interest expense/ Interest expense

19.57

16.72

10.98

18.45

Debt Service coverage

1.10

1.36

1.02

1.19

For my analysis, I have used four ratios. First ratio indicates that the debt of the company is adequately covered with the FFO. The ratio has shown a downward trend over the past three years. However, I believe the FFO to debt ratio will be around 0.85 for the current year. Nevertheless, the firm is generating enough cash flows to cover the long term debt. The second metric indicates that one of the most important components of the firm is easily covered with the FFO of the company. As I mentioned, capital expenditures are an integral cash outflow for Coca-Cola, and the analysis shows that the firm is able to meet its capital spending requirements through its internally generated funds.

Last two metrics in the table indicate that the firm is able to meet its interest and debt payments sufficiently. Interest coverage is extremely strong for the company, and it should not face any trouble paying its interest obligations. Furthermore, debt service coverage is also covered with cash flows. Debt service coverage for the past twelve months has come down due to an increase in the short-term debt. Overall, the solvency position of the company is solid.

Summary

Coca-Cola is one of the biggest brands in the world. The company has a global presence, and it has a special position in the market. It is a mature company operating in a low growth industry. As a result, there are not many opportunities for the company to grow substantially. However, the global presence and its market position give Coca-Cola an advantage over other players in the industry. Operating in a mature industry means the company can pay a substantial amount of cash flows to its shareholders. As my analysis shows, Coca-Cola distributes a major portion of its free cash flows to its shareholders. I believe the company will carry on paying its dividends.

Source: Strong Cash Flows Back Coca-Cola Dividends