Buy Coke Now, Or Wait For A Pullback?

Jun. 12, 2012 9:19 AM ETThe Coca-Cola Company (KO)3 Comments
Mike Young profile picture
Mike Young

The Coca-Cola Company (NYSE:KO) is the world's largest beverage company. It owns or licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages, but also a variety of still beverages such as waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks.

Coke has been a steady source of dividends for investors seeking income. Over the past decade, the company has consistently raised its dividend, even during the financial crisis. Furthermore, the dividend has typically grown at a double-digit rate, although the rate of growth slowed slightly in the past few years.

Below are Coke's historical dividends and growth rates for the past ten years:

Year Dividend Dividend Growth
2002 $0.8 --
2003 $0.88 10%
2004 $1.00 14%
2005 $1.12 12%
2006 $1.24 11%
2007 $1.36 10%
2008 $1.52 12%
2009 $1.64 8%
2010 $1.76 7%
2011 $1.88 7%

Coke has also done an excellent job at consistently growing its free cash flow. FCF per share has increased every year over the same time period, with the exception of 2009, which experienced a slight decline. Over the past two years, FCF per share has been growing in the mid- to high-teens, and the five-year compounded annual growth rate is almost 12%.

In addition, Coke has maintained a consistent payout ratio that was typically in the low 40's. That is a reasonable level in terms of providing room for future dividend growth. Most importantly, the payout ratio does not indicate that the company is stretching its available cash flow, or would need to strain its balance sheet, in order to maintain smooth dividend growth.

Year FCF/Share Payout Ratio (Div/FCF per share)
2002 $1.99 40%
2003 $2.31 38%
2004 $2.45 41%
2005 $2.59 43%

This article was written by

Mike Young profile picture
Michael Young is managing partner of Sahana Capital LLC, a Philadelphia-based money management firm. As a registered investment adviser (RIA), he provides clients with investment advice, asset allocation strategies and portfolio construction recommendations.

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