Coca-Cola (KO) has raised its dividend at a slow pace in the last five years. This is natural, given the absence of earnings growth over this period. However, the company recently returned to its long-term growth trajectory. Therefore, the big question is whether the company will accelerate its dividend growth next month when it announces its next dividend hike.
Coca-Cola has dramatically underperformed the market in the last five years. During this period, the stock has gained 12%, whereas the S&P has rallied 52%. The reason behind this disappointing performance is the decrease in the revenues and earnings throughout this period. Since 2013, the revenues of Coca-Cola have decreased 31% while its earnings have remained essentially flat. The plunge in revenues can be mostly attributed to the re-franchising of the bottling operations, but the absence of growth in the bottom line is certainly disappointing.
As the beverage giant has essentially expanded in every single country in the world, it has become very hard to continue to grow at a decent pace. In addition, consumers are becoming increasingly health-conscious every year. Consequently, they tend to reduce their consumption of soda. To be sure, the U.S. soda consumption per capita has fallen to a 30-year low level, while the total U.S. soda consumption has decreased for 12 consecutive years. As the flagship segment of Coca-Cola still generates about half of its total sales, the above secular trend is a strong headwind for its overall performance.
Coca-Cola changed its CEO about one and a half year ago. The quality of management is paramount in the business performance of every company. Indeed, the change in the CEO position has proved a game changer for the beverage stalwart so far.
After several years without growth, the company grew its comparable earnings per share by approximately 9% last year, from $1.91 to $2.08 and is expected to grow them by another 7% next year. In the most recent quarter, revenues declined 9% but only due to the re-franchising of the bottling operations. Organic revenues grew 6% and comparable earnings per share climbed 14%. These results reflect an impressive improvement compared to the performance of the company in recent years.
The improved performance has been driven by management's initiatives in the category of sparkling soft drinks, as evidenced by the double-digit volume growth of Coca-Cola Zero Sugar. The latter is likely to remain a growth driver for the foreseeable future.
Moreover, Coca-Cola recently announced the acquisition of Costa Limited and thus entered the coffee business. Costa will offer its expertise in all the aspects of the coffee business while Coca-Cola will try to leverage the potential of this business via its own strengths. The acquisition is expected to close in the first half of the year.
Furthermore, while Coca-Cola has an extremely high market share in sparkling soft drinks and thus has limited growth potential in this category, it has a much lower market share in other categories, such as juice, dairy, hydration, and energy drinks.
Source: Investor Presentation
As a result, management expects significant growth in these categories in the upcoming years. In the most recent conference call, management stated that it was observing very strong performance in smartwater and tea.
Resilience to recessions
As consumers hardly reduce their consumption of the products of Coca-Cola even under the most adverse economic conditions, the beverage giant has proved markedly resilient to recessions. In the Great Recession when most companies saw their earnings collapse, the earnings per share of Coca-Cola dipped only 3% in 2009 and jumped 19% in 2010.
As a recession has not shown up for nine consecutive years, the resilience of Coca-Cola is paramount. Moreover, in the sell-off of the S&P in December, the stock of Coca-Cola remained firm and outperformed the index by a wide margin. As a result, it saved its shareholders from the pain of paper losses and the temptation to sell their shares to avoid this pain. To cut a long story short, the defensive nature of Coca-Cola is a great advantage, which prevents negative surprises related to its dividend and secures a good night's sleep for its shareholders.
Coca-Cola has raised its dividend for 56 consecutive years. It thus belongs to the group of dividend kings. While this record is exceptional, the company has raised its dividend at a slow pace in each of the last five years due to its inability to grow its earnings throughout this period. More precisely, the company has raised its quarterly dividend by $0.020-0.025 per year in each of the last five years. This growth pace has corresponded to a 5-6% annual dividend growth rate.
On the one hand, Coca-Cola has returned to growth mode lately and hence, it can accelerate its dividend growth. On the other hand, the company made six acquisitions in 2018 and has an elevated payout ratio, which currently stands at 75.0%. As a result, management is likely to somewhat enhance dividend growth rate but not to a great extent. Overall, I expect a quarterly dividend hike of 7.7%, from $0.39 to $0.42, in February.
Coca-Cola has underperformed the market by a wide margin in the last five years but it seems to have reached an inflection point, mostly thanks to its new CEO. The company grew its earnings per share for the first time after several years in 2018 and has promising growth prospects ahead. As a result, it is likely to somewhat accelerate its dividend growth next month and offer more meaningful dividend raises in the upcoming years.
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.