With the Federal Reserve forecast to raise interest rates by just 25 basis points over the next year, we're bullish on the prospects for income stocks. That's because in our view they will remain popular plays among investors struggling to generate a good income return elsewhere and with Coca-Cola (NYSE: KO) yielding 3.2% right now, it has appeal as an income play at face value. That's even more so due to the S&P 500 having a yield of 2.1%.
More importantly than its yield, though, we think that Coca-Cola's dividend growth prospects are very bright and that the following three catalysts will boost the company's profitability, dividends and share price moving forward.
A changing business
With customer tastes changing, Coca-Cola is adjusting and adapting as a business. For example, consumers are becoming more health conscious and are seeking to reduce the amount of sugar that they consume. As a result, healthier beverages have become more popular in recent years and this trend looks set to continue.
In response to this, Coca-Cola has taken actions such as introducing new products such as Coca-Cola Life and tripled to 27 the number of markets for the beverage. It has also invested in promising brands such as Suja, which is a line of premium organic, cold-pressed juices. In our view, this shift towards healthier options could positively catalyse Coca-Cola's earnings, dividends and share price moving forward.
Similarly, Coca-Cola has responded positively to changing consumer views on the environment. A greater number of people are concerned about recycling today and this trend looks set to continue in our view. In response, Coca-Cola has announced that it expects to meet its goal of 100% water replenishment five years ahead of schedule. It has also tested a new PlantBottle package which is 100% made from plant material. In our view, changes such as these will help to boost Coca-Cola's environmental and sustainability credentials with consumers and improve customer loyalty, thereby acting as a positive catalyst on the company's profitability, dividends and share price moving forward.
We're also bullish on Coca-Cola's dividends because of its exposure to international markets which are growing at a rapid rate. For example, in China spending on consumer staples is forecast to rise by 5% per annum over the next four years, while spending on consumer discretionary items is expected to increase by 7% per annum during the same time period. Allied to this is the fact that average incomes in China are forecast to rise by 50% by 2020. As such, the region presents a stunning growth opportunity for Coca-Cola which could boost its financial performance and dividends.
Further, Coca-Cola is adopting the right strategy in our view to benefit from the strong growth prospects in China and the emerging world. For example, it is focused on volume and on building a foundation for long term success. In other words, Coca-Cola is not focused on price/mix to the same extent as it is in developed markets, which should allow it to build market share in developing markets and seek to improve margins in the long run. In our view, this is a sound strategy which could boost its profitability, dividends and share price moving forward.
Coca-Cola is also investing heavily in its brands and we think this will positively catalyse its earnings, shareholder payouts and share price moving forward. For example, it has invested in more and better marketing, including a double-digit increase in spending on media advertising in the last financial year. It has also developed a new global marketing campaign for Trademark Coca-Cola to form part of an innovative 'one brand' strategy to link all Coca-Cola variants more closely together.
In addition, Coca-Cola has invested in new brands such as Monster, which strengthens its position in the fast-growing energy category. It has also acquired a brand of protein-based drinks called China Green Culiangwang, while expanding nationwide the US distribution of fairlife ultra-filtered milk in tandem with Coca-Cola's partners at Select Milk Producers. These investments have the potential to boost Coca-Cola's financial performance, dividends and share price moving forward.
Of course, Coca-Cola's international exposure could cause challenges for it in the short run. As mentioned, the Federal Reserve is forecast to raise interest rates by 25 basis points in the next year. This comes at the same time as policymakers across the globe are easing monetary policy. For example, quantitative easing continues in Europe, while the UK and Australia have recently reduced interest rates.
This means that the US dollar is expected to strengthen versus a basket of world currencies and this is likely to cause a negative currency impact on Coca-Cola's earnings in the near term. In fact, Coca-Cola stated in its Q2 update that it expects currency to be a 2 point headwind on net revenues in Q3 at current spot rates.
While this is a risk to Coca-Cola's near term future, we think that its growth potential, brand investment and how it is adapting to changing consumer tastes will positively catalyse its earnings, dividends and share price moving forward. As such, in our view Coca-Cola is a stunning dividend stock.
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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.