Coca-Cola: A Conservative Dividend Stock For 2012

|
 |  About: The Coca-Cola Company (KO), Includes: PEP
by: Todd Johnson

There are a significant number of dividend investors searching for higher dividend income. These same investors want to protect their nest egg from significant capital losses. The desire for nest egg safety has become paramount due to the U.S. Treasury bond market. The economic climate has forced conservative investors to exit the U.S. Treasury bond market due to record low yields. A 30-year U.S. Treasury bond, as of December 29th, yields 2.90%. A 1-year Treasury bill offers 12 basis points. Thus conservative investors have sought safe dividend stocks. The thrust of this article is to conclude that Coca-Cola Company (KO) is a conservative dividend stock.

Coca-Cola's annual returns versus the Standard & Poor's 500 Index (see here):

Dividend Yield

Coca-Cola currently pays a 47 cent per share quarterly dividend. The company yields approximately 2.8% based upon the current dividend yield. This should continue to grow at a 2-3% rate in future years.

The 2012 dividend should be approximately $2.04 per share. This would provide a 2.9% dividend yield based upon today's current $69.97 price per share.

Dividend Growth

Coca-Cola is well known for increasing its dividend each year. The future growth is based upon further development in four core markets. Coca-Cola will invest at least $20 billion in the Africa, China, Mexico, and Russia markets. These markets will ensure continued case volume growth is achieved during the approaching years.

Coca-Cola announces growth objectives on a regular basis. On April 12th, 2011, the company announced plans to invest $62 million in Kenya. This will expand the company's presence in an individual country, although the company is growing worldwide.

Safety

I was recently asked by a number of individuals for a conservative stock to invest in without the risk of any major negative surprises. I honestly have to admit that Coca-Cola is a stock to buy and hold. The company's business model is selling the leading carbonated beverage on a worldwide basis. Sugar water sells today and will sell tomorrow.

I recommend Coca-Cola as a stock to hold to reduce overall portfolio beta. The dividend has increased for a consecutive 49 years.

Competition

Coca-Cola clearly has a business model which is a moat. Coca-Cola continues to maintain a 40% plus market share in carbonated beverages. Pepsi, Inc. (PEP) remains a strong second competitor with its name brand products. I am long Pepsi because of the Doritos ownership. Doritos is a chips and snacks sector. Pepsi may at some time divest itself of Doritos to its current share holders. The current dividend yield is 3.10%.

Overall Returns

Coca-Cola's annual returns have increased since the company increased its dividend payout ratio from 38% in 1997 to 49% in 2011.

The current valuation is based upon Coca-Cola earning approximately $3.88 per share. This would place the stock at an 18x price to earnings multiple. Coca-Cola should earn approximately $4.30 per share in 2012. This would give the stock a 16x price to earnings multiple.

The company's last 3rd quarter earnings provided an 8% growth in earnings per share. This data, presented on October 18th, 2011, was above corporate expectations. The company is well positioned to extend its overall industry leadership.

Beta

Coca-Cola trades at 49% of the market's volatility. This provides comfort to share holders who do not like to see their stocks trade with wide swings. The company's share buyback plan is adequate to soak up shares to reduce increased price action beyond the average stock price.

Action

The Coca-Cola Company is a blue chip dividend stock which requires no introductions. The premier soft-drink Company which has been in existence for over 100 years. The company currently is a $150 billion market cap enterprise.

The company trades at a 2.8% dividend yield. I recommend Coca-Cola be part of an aggregate higher yield portfolio. To this extent, high yielding sectors should be included to provide a higher aggregate portfolio yield. Coca-Cola should be part of a portfolio including closed end funds, trusts, master limited partnerships, option income securities, and bonds.

Investors can not accept a below 3% yield. The appropriate portfolio should take advantage of the current equity and bond opportunities. Coca-Cola should be one of the lowest yielding dividend stocks within a dividend income portfolio.

Disclosure: I am long KO, PEP.