On February 19, 2016 Coca-Cola (NYSE:KO) recently announced a 6.1% increase to its quarterly dividend from $0.33 per share ($1.32 annually) to $0.35 per share ($1.40 annually). This continues a long streak for the company of dividend growth and marks the 54th consecutive annual dividend increase for Coca-Cola. With this increase, Coca-Cola now yields slightly over 3.20%.
Why was the increase only 6.1%?
Over the past few years, Coca-Cola's typical dividend increases have been moderately higher than the 6.1% posted for 2016. The last ten years of dividend growth are shown below:
- 2015: 8.2%
- 2014: 8.9%
- 2013: 9.8%
- 2012: 8.5%
- 2011: 6.8%
- 2010: 7.3%
- 2009: 7.9%
- 2008: 11.7%
- 2007: 9.7%
- 2006: 10.7%
Since 2006, Coca-Cola has averaged a dividend-growth rate of around 9% and these were also within a tight range of mostly 7-10%. In other words, the 2016 dividend increase of just 6.1% is a clear outlier.
Though, this was not much of a surprise for me. As I noted in a recent article, I was expecting Coca-Cola's dividend growth rate in 2016 to disappoint. I was projecting a 3-6% increase, so the company came in at the top of my range.
My reasoning was simple -- Coca-Cola was already paying out nearly 100% of its free cash flow "FCF" to shareholders via dividends and stock buybacks in 2015, not leaving much wiggle room for 2016. Outside of a rise in core profitability, Coca-Cola was not going to be able to grow its dividend as much as in the past.
Payout ratio is elevated
One concern I do have is that Coca-Cola's dividend payout ratio is getting high. The new dividend represents ~72% of estimated 2016 EPS of $1.94 and ~75% of 2015 FCF per share of $1.86. Over the past ten years, Coca-Cola's payout ratio has been more towards 50-60% of EPS and 60-70% of FCF.
The dividend increase could be telegraphing a strong year
The fact that Coca-Cola chose to increase its dividend 6% for 2016 is a good sign. Guidance for the year was already calling for fairly strong currency neutral EPS growth of 4% to 6%, which includes a 9 point currency headwind.
Though, given the recent weakness in the dollar, these headwinds may be turning into tailwinds. If the dollar does not strengthen from current levels, Coca-Cola is in for a much better year. As the majority of revenues come from overseas, a weak dollar means these revenues will convert over into more dollars. This should help in EPS growth translating into FCF growth, which would improve the payout ratio.
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Coca-Cola continues to be a blue-chip dividend-growth stock. The 3.2% is well above what you would get with Treasuries, while the dividend growth rate remains decent.
Coca-Cola core fundamentals also remain intact. Volumes are growing, despite the shift away from soda in the US and Europe, while Coca-Cola's brands and global footprint provide it with a massive moat.
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Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: I am/we are long KO.
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.