A Dividend Sin: Selling Coke To Buy An Apple

| About: The Coca-Cola (KO)

The rules for dividend growth investing are pretty simple. Buy companies that raise their dividend year after year. Sell companies that fail to do so. That's pretty much it but I imagine there is at least one unwritten rule about dividend growth investing: Buy Coke (NYSE:KO). The corollary is to never sell Coke.

But in case you haven't paid attention to the markets lately we are having some wild times. The price of gold faced literal decimation on Monday, down over nine percent. The S&P is in flux this week while the 10 year Treasury yield drops to a multi year low.

Even crazier to me is that because of recent price changes, dividend stalwart Coke has the same yield as Apple (NASDAQ:AAPL). KO just celebrated its 50th consecutive year of dividend increases and AAPL has not even paid dividends for a full year yet so I readily admit their dividend pedigree is quite different. But the yield is the same at 2.63%. Dare I think it but is AAPL a better dividend growth play than KO?

A Small Bite of Apple

I'm sure we've all heard for months or years that AAPL is the best thing for your portfolio since compounding interest. Yes, at their highs they were the largest company in the world by market cap. Today they set a new 52 week low that only gives them a $378 billion dollar market cap. Regardless, we're concerned with the dividend specifically, not the share price. AAPL's dividends are paid from cash available to the company so let's look there first. All figures are in millions of dollars:

Net Sales % Change Net Income % Change
2012 $156,508 44.58% $41,733 60.99%
2011 $108,249 65.96% $25,922 84.99%
2010 $65,225 52.02% $14,013 70.16%
2009 $42,905 32.10% $8,235 70.36%
2008 $32,479 35.30% $4,834 38.27%
2007 $24,006 24.29% $3,496 75.77%
2006 $19,315 38.65% $1,989 48.99%
2005 $13,931 68.27% $1,335 383.70%
2004 $8,279 33.38% $276 300.00%
2003 $6,207 $69

Now I'm not some AAPL permabull from way back. My interest in AAPL started with their dividend but take a look at those numbers. Since 2003 the lax year of sales growth is 24% and the lax year of income growth is 38%. Somehow we experienced the Great Recession and unemployment of 15% (U6) but AAPL kept growing at an astounding rate. It's not even worth charting EPS but suffice to say it went from $.09 in 2003 to $44.15 in 2012.

Unfortunately their dividend history does not exist for us to examine. They started paying dividends last year and have paid three thus far. But even not considering their $140 billion cash and cash equivalents we can just agree that their dividend is adequately covered just from the 12% payout ratio. With CEO Tim Cook displeased with the share price and looking to return value to shareholders I feel confident that AAPL has the capacity and the drive to continue increasing their dividends.

Magic In A Bottle

And now we turn to a company that needs no introduction: Coca-Cola . KO has been great to shareholders over the years, there is no doubting that. They sell a great, very low cost product that gets used once and replenished. The business model is foolproof.

KO has also been great about sharing those profits with shareholders. I won't be going into their finances because, honestly, there is nothing you nor I will find there that hasn't been said already. If you want a recap just check out their quarterly report from this week. What we're really concerned about is the dividend. And at only 2.63% yield we're just as concerned about the dividend growth as much the initial dividend. Historically, here is how KO has grown their dividend:

Declared Amount Increase Avg 5 Year Increase
02/21/13 $0.28 9.80% 8.07%
02/16/12 $0.51 8.51% 8.46%
02/17/11 $0.47 6.82% 8.69%
02/18/10 $0.44 7.32% 9.47%
02/19/09 $0.41 7.89% 10.41%
02/21/08 $0.38 11.76% 11.56%
02/15/07 $0.34 9.68% 11.21%
02/16/06 $0.31 10.71% --
02/17/05 $0.28 12.00% --
02/19/04 $0.25 13.64% --
02/20/03 $0.22 -- --

In the last five years, KO has reduced their dividend growth rate but as of 2012 their five year dividend growth rate is still 8%. If we look at the dividend back to 1970 the annual increase is 10.66%. That is a great long term performance which translates to the dividend doubling every seven years. With a 52% payout ratio KO can maintain their dividend now and in the future.


On one hand we have AAPL who is new to the dividend game but flush with cash. On the other hand we have KO who has paid quarterly dividends for 93 years and increased them for 50 years. How do we compare the two?

If you sleep better at night knowing that you can look forward to increased dividends I would have to recommend KO. Their track record is impeccable. Their business model is solid and has proven to be recession proof. I have held KO for a few years and I would like to include them long term in my portfolio. They have a 52% payout ratio so the dividend is safe and they will continue to run a successful business. However I do wonder how they will continue to increase the dividend in the very long term. Of course KO has the iconic soft drink Coca-Cola as well as sports drinks and teas which people will no doubt continue to enjoy indefinitely so demand should not be a problem. But a lot of the earnings growth of KO (and many other US companies) is from foreign markets, especially developing countries. I believe demand there will continue to grow but how is KO going to repatriate the earnings to pay the dividend back home in US dollars? Again, I don't see this as a problem unique to KO but if plan to hold KO for a few decades it is a relevant question. Will they go the Philip Morris (NYSE:PM) and Altria (NYSE:MO) route, splitting the company to focus on foreign and domestic market separately? Only time will tell.

However, if you have the time and fortitude to take more risk in your pursuit of dividend growth I would say now is the time to consider AAPL. With the recent slide in their share price the yield is comparable to a number of well established dividend paying companies like Proctor and Gamble (NYSE:PG), Aflac (NYSE:AFL) or Illinois Tool Works (NYSE:ITW). AAPL has not even paid a dividend for a year yet but they have a stated long term outlook and a drive to deliver value to shareholders. Coupled with their titanic cash flow and cash hoard one has to believe that they will increase their dividend. AAPL's 12% payout ratio looks miniscule in comparison to KO's albeit moderate 52% payout ratio. I have no idea what dividend growth AAPL may deliver but they are more than capable of thrashing KO's dividend growth in the short term--and that's assuming AAPL stops growing earnings entirely.


I took some heat in another article that suggested selling a dividend position that experienced a 50% share price gain. I can only imagine that if I advocate selling KO for AAPL the digital pitchforks will come out and someone will try to burn my avatar at the stake.

I will simply remind readers that all of my investments are in a Roth IRA and no sales are taxable events. I am still well within my accumulation phase and I have the luxury of not relying on dividends to support my day to day life. I spend a lot of time reading Seeking Alpha articles, some of which are the reason I turned to dividend growth investing in the first place. It can be discouraging however to see so many articles discuss investing my entire portfolio's value in a single position; I think that younger investors or Roth IRA investors are somewhat underserved by the majority of dividend growth articles on Seeking Alpha. So when I tell you that I have an order in to sell my KO shares that are up 40% over my cost basis and buy AAPL for dividend growth remember that this isn't a blanket statement. But if can tolerate the extra "risk" of expecting a dividend from a company that effectively has $140 billion in the bank, hold on, because I think we're in for a ride.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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