Coca-Cola Stock: Is This Dividend King on the S&P 500 a Buy?
28 October 2021 - 9:44PM
Finscreener.org
Investing in blue-chip dividend
stocks is an excellent way for investors to derive passive income,
given that interest rates are near record lows. Generally, a
dividend-paying company generates consistent profits, steady cash
flows and may also be part of a mature industry. These companies
have a wide economic moat and a loyal customer base increasing
their ability to pay out excess profits to investors in the form of
dividends.
These factors also make blue-chip
dividend paying companies a less risky investment. One such stock
that has a long history of dividend payments in beverage
giant Coca-Cola (NYSE:
KO). Also part of Warren
Buffett’s portfolio, Coca-Cola offers investors a forward yield of
3.1% while generating predictable cash flows and robust profit
margins. Let’s see if KO stock should be on the radar of dividend
investors right now.
Coca-Cola stock is up 50% in the last five
years
Let’s see how Coca-Cola has
performed in recent years, compared to the S&P 500. In the
last year, KO stock is up 10.8% and it has gained 50% in the last
five years. Since October 2011, Coca-Cola stock has returned 121%
to investors. Comparatively, the S&P 500 has returned 33.6%,
133% and 350% to investors in the last one-year, five-year and
10-year period respectively.
Coca-Cola is one of the most
famous brands in the world and has a large portfolio of beverage
products. Despite a challenging 2020, Coca-Cola generated $11.5
billion
in free cash flow
while its revenue fell to $33
billion last year from $37.22 billion in 2019.
The free cash flow is an
important metric as it provides investors insights into a company’s
ability to maintain and even increase dividend payments. Further, a
company can also choose to repay debt, reinvest capital to expand
its business or buyback shares with the excess cash. One reason for
Coca-ColaU+02019s stellar cash flow metrics is its pre-tax margin
that averaged over 24% in the last decade.
Coca-Cola’s sales were impacted
amid COVID-19 as several of its business avenues such as theme
parks, restaurants, stadiums and theaters were shut. As economies
have reopened this year, analysts expect sales to rise by 14.9% to
$38 billion in 2021 and by 5.7% to $40 billion in 2022. Wall Street
also expects Coca-Cola to increase its adjusted earnings at an
annual rate of 10% in the next five years.
What next for KO stock?
Given the company’s forecasts and
a market cap of $237 billion, KO stock is valued at a forward price
to sales multiple of 6.2x and a price to earnings ratio of 24x
which might seem steep for a mature business. But its revenue
increase this year as well as earnings expansion might continue to
benefit investors as analysts expect KO stock to touch $62 in the
next 12-months. After accounting for its dividend yield, annual
returns may be close to 20%.
Coca-Cola also has an enviable
history of dividend increases. Its annual dividend per share has
increased from $0.25 to $1.68 in the last three decades. In fact,
Coca-Cola is a Dividend King that has increased payouts for 59
consecutive years.
A key driver of KO stock will be
the company’s
upcoming earnings results this week. Analysts expect Coca-Cola to report
revenue of $9.75 billion and adjusted earnings of $0.58 per share
in the September quarter. In case, Coca-Cola can beat consensus
estimates and provide a better-than-expected guidance, the stock
should gain significant momentum in the next trading
sessions.
The verdict
Coca-Cola is a stock that will
help you generate inflation-beating returns over time, but it might
struggle to outpace the S&P 500 consistently. Its low beta
of 0.64 makes the stock extremely attractive to risk-averse
investors right now.
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