Coca Cola (NYSE:KO) is unarguably a stock with a solid track record of juicy dividend payments. Coca Cola has paid solid dividends regularly for the past decades and it is an established brand known worldwide. Using a combination of attractive dividend yield of 2.7 percent which KO stock has maintained since 2007 and its impressive record of earnings growth, Coca Cola has returned about 50 percent ROI to date. Compared to its peers in the beverage industry such as Pepsi (NYSE:PEP), Dr. Pepper Snapple Group (NYSE:DPS), and Molson Coors Brewing Company (NYSE:TAP), Coca Cola has the largest market share with 42% while Pepsi and Dr Pepper maintain a market share of 29.3% and 16.7% respectively. Coca Cola and Pepsi share similar characteristics: the two companies were known for regularly offering their shareholders dividend payouts with dividend yields that exceed the yields on the S&P 500 index. The future outlook of the Coca Cola Company is not in doubt, but does its recent 2 to 1 stock split really make the stock more attractive to investors?
Indeed, a company may choose to split its stock if its directors strongly believe that the stock has become too expensive in dollar value, and would like to make it more liquid or affordable to many investors. Also, a company may split its stock if that stock is trading too far above its industry peers. In actual fact, at over $74 before the stock split, KO stock was rather expensive for many investors, and a lot of stock traders would prefer paying about $39 per share now to paying about $78 per share before the stock split. The recent stock split of 2:1 means the total shares of Coca Cola doubled from 5.6 billion units to 11.2 billion shares; that is one of the historical effects of a stock split. It is to be noted that since 1919 when Coca Cola began trading, the recent stock split makes it the tenth time that the company would have its stock split and the first in the last 16 years.
On the surface, Coca Cola's recent stock split does not affect the current holdings of existing shareholders. Simply put, it only doubles their holdings while the price of each stock drops to half of its price at the time of the split. The positive effects that the stock split could have on Coca Cola stockholders certainly exist but are not far reaching. One benefit is that investors will find it easier to trade the stock of Coca Cola after the split. Also, it will be easier for shareholders that like stock trading to get in and out of KO stock and assume new positions with greater speed.
There were mixed opinions of analysts about whether KO stock was overvalued before the stock split. Before the stock split, many analysts felt the stock was actually trading far above its industry peers just like Pepsi. The stock of Coca Cola Company like many other dividend stocks has always remained an impeccable long-term prospect, yet when the stock was considered overvalued, it invariably meant that a potential investor would have paid more than the actual worth for the stock, and that was a risk many discerning traders wouldn't want to take. With the stock split, the coast is clear and many investors should find KO stock attractive and worth buying.
Evaluation and Outlook
Coca Cola maintains a strong cash flow and it is a company that has a good pedigree for increasing shareholder value through a combination of good dividend payouts and share buybacks. Coca Cola grew its earnings per share in the last 5 years at an average rate of 11.3% each year. KO stock has a forward price earnings ratio of 18.5x and a forecast earnings per share growth of 9% for the next financial year. On dividend payouts, Coca Cola raised its payouts per unit to shareholders by 8.5% last February. The Coca Cola Company expects its revenues to double over the next ten years which was what influenced the stock split, and I believe that the stock will start to head higher soon as some existing investors consider picking up more units while other investors also contemplate taking up a position in the market leader.
Disclosure: I 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.