Coca-Cola: Q2 Earnings Could Create Opportunity For Dividend Investors

| About: The Coca-Cola (KO)

Summary

Coca-Cola has been slowly adapting to consumers tastes and strengthening its product portfolio with the acquisition of still beverage brands.

Coca-Cola's more than 15 "billion dollar", still brands led revenue growth in the last quarter; growing more than 7%.

Q2 results look weak, and could provide an attractive play for dividend investors looking to introduce KO as a defensive stock to their portfolio.

Analysis

Solid Earnings and Changing Consumer Tastes. Perhaps recognizing the dangers associated with excessive consumption of its flagship product as well as the detrimental impact of impending soda taxes , Coca-Cola (NYSE:KO) has moved deliberately in acquiring a number of non-carbonated or 'still' beverage brands over the years.

As a result, the Atlanta-based beverage behemoth now has fifteen 'billion dollar' non-carbonated beverage brands that include Minute Maid, Dasani, VitaminWater and Powerade. Non-carbonated beverages now make up 27% of its total global case volume and have provided a way for Coca-Cola to appeal to more health-conscious buyers.

Dividend Impact and Outlook. With an annual dividend yield of around 3.1%, investors who invest $10,000 in Coca-Cola shares can expect around $310 a year in passive income. Coca-Cola's dividend yield is the second-highest in its sector (next to that of its subsidiary, Coca-Cola European Partners Plc (NYSE:CCE)).

There is every reason to believe that Coca-Cola will continue paying dividends going forward. The company has paid a quarterly dividend since the 1960's and its short-term liquidity ratios are superior to that of its industry peer group. Specifically, Coca-Cola has $0.74 of liquid assets with which to settle each dollar of its short-term liabilities - this ratio is nearly 60% better than that for other similar companies.

Meanwhile, Coca-Cola's earnings have been fairly stable - in its fiscal first quarter, it reported organic revenue growth of 2% while its earnings per share was at $0.34 compared to $0.35 a year earlier. Coca-Cola's revenue performance was led by 7% volume growth in its still beverage sales. Coca-Cola did provide moderately lower guidance for its fiscal second-quarter because of one-off considerations and analysts expect revenue decline of 3.5%.

While investors would certainly prefer to see revenue growth from the company, this is unlikely to prevent the company from paying dividends - indeed, in Coca-Cola's fiscal first quarter, its revenues declined by 4% but the company still continued to pay dividends.

Going forward, analysts expect Coca-Cola's revenues to grow by 4.5% on average over the next five years. While this is less than a third of the rate of growth expected for investors, it's important to note that this is still equivalent to approximately $2 Billion a year in incremental gross revenues - and an additional $0.076 in earnings per share (at Coca-Cola's current Net Income Ratio). Given that Coca-Cola's dividend payout ratio is 72.5, this means dividend investors can expect another $0.05 to $0.06 of additional dividends per year.

The one cause for concern for investors is Coca-Cola's high level of debt, which is the product of its stock buybacks over the years, as evidenced by the $45.5 billion it holds in Treasury Stock. Both Coca-Cola's debt-to-equity and leverage ratios are considerably higher than its peers,' so investors may be concerned just on the face of it.

Investors worried about the negative impact of Brexit should pay careful attention to Coca-Cola's earnings performance in the 3rd and 4th quarters of Fiscal 2015 when the Grexit crisis roiled markets - revenues were only slightly lower and seemed to be more affected by the general decline in the consumption of carbonated drinks rather than a reflection of macroeconomic shocks. To the extent that Brexit and Grexit are symmetric drags to European aggregate demand, Coca-Cola can probably expect the revenue impact of Brexit to be similarly muted.

Nonetheless, it's worth pointing out that the ratio of Coca-Cola's Net Debt to its annualized EBITDA is at 2.46 - or less than the reading of 3.0 that is generally considered worrisome. In fact, credit ratings agency Moody's recently gave Coca-Cola's senior unsecured debt a 'Aa3' credit rating, which means that it judges Coca-Cola to have a superior ability to repay its short-term debt obligations. On a practical level, it's worth noting that Coca-Cola actually had net interest income in its fiscal first quarter. In short, its debt is not an impediment to its ability to pay dividends.

Coca-Cola shares are up 7% in 2016 - better than the 2.8% return on the Dow Jones Industrial Average, of which it is a component. Considering Coca-Cola's relatively lukewarm operating performance in 2016, its stock's outperformance is a testament to the stock's defensive nature. In that sense, investors need to time their purchase of Coca-Cola if they wish to increase their dividend yield on the stock.

Conclusion

Ultimately, Coca-Cola is a defensive play that investors who are worried about broad market weakness should have in their portfolio. Coca-Cola's shares are close to their 52-week high so investors should be careful in acquiring shares at current market prices.

Instead, investors should probably wait until Coca-Cola's next earnings report on July 27 before purchasing the stock. The idea is that, since investors are already expecting a down quarter from the company, any revelations that hew to the negative side are likely to punish the stock, creating an opening for investors to take a position at a higher dividend yield.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.