This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
Volatility has reared its ugly head once again, due to the coronavirus crisis and fears of a recession. The S&P 500 Index has declined 15% year-to-date, and certain industries such as cruise lines, airlines, and energy stocks have been hit particularly hard.
In times of elevated uncertainty, income investors should look to high-quality stocks that have a long history of raising their dividends each year. An example of this is The Coca-Cola Company (KO), which has raised its dividend each year for 58 years in a row. It has kept on increasing its dividend each year, even through multiple recessions, thanks to its defensive business model and world-class brand.
Coca-Cola is a Dividend Aristocrat, a group of 66 stocks in the S&P 500 with at least 25 consecutive years of annual dividend increases. Coca-Cola will have little trouble maintaining its dividend growth in the years ahead, even if the U.S. economy goes into a deep recession.
Business Overview and Recent Events
Coca-Cola is the world’s largest beverage company, as it owns or licenses more than 500 unique non-alcoholic brands. Since the company’s founding in 1886, it has spread to more than 200 countries worldwide. It currently has a market capitalization of $201 billion and its brands account for about 2 billion servings of beverages worldwide every day, producing roughly $39 billion in annual revenue.
The company has generated steady growth over the past several years. 2019 was another year of growth for Coca-Cola. Fourth-quarter results were better than expected on the top and bottom lines. Revenue grew 16% in the fourth quarter to $9.1 billion, while full-year revenue increased 9% from the previous year.
Organic revenue increased 7% for the quarter and 6% for the year, a very strong rate of organic growth that shows the company’s strategic initiatives are paying off. Concentrate sales grew 2% while price and mix boosted sales by 5% for the quarter. Despite the difficulties facing Coca-Cola and the broader U.S. economy over the remainder of 2020, we maintain a positive long-term outlook for the company.
Long-Term Growth Remains On Track
Coca-Cola still has multiple long-term growth catalysts, particularly in still beverages, coffee, and also growth in new geographic markets. For example, Coca-Cola acquired Costa in a $4.9 billion acquisition, which gave it instant exposure to coffee, a growth market. Coca-Cola stated at the time of the acquisition that the global coffee market was growing at 6% per year, and Costa has operations in more than 30 countries.
The emerging markets continue to be a long-term growth driver for Coca-Cola, even as the coronavirus poses a significant challenge in the near-term. Emerging markets such as India and China remain highly attractive markets for U.S. consumer brands such as Coca-Cola, due to the large populations of these countries and high potential for long-term economic growth.
Underdeveloped nations will be dragged down by the coronavirus in the short-term, but should return to high rates of economic growth once the coronavirus has passed. These countries had contributed heavily to Coca-Cola’s strong results prior to the coronavirus spread. For example, in the 2019 fourth quarter Coca-Cola’s Asia-Pacific segment grew unit case volume by 2% (compared with flat case volume in North America) and price-mix growth of 5% (compared with 2% growth in North America).
We also believe Coca-Cola will navigate a recession much better than many other companies. Whereas many companies such as airlines, cruise lines, and restaurants are fighting for their very survival during the coronavirus outbreak, Coca-Cola will likely see only a minor disruption to its business.
In fact, the company recently updated investors about the impact from coronavirus on its business model. While Coca-Cola estimates a negative impact of 2% to 3% on first-quarter case volume and a negative 1% to 2% to organic revenue, it reaffirmed its previously guidance for the full year. Coca-Cola previously guided to 5% growth in organic revenue (which excludes currency impacts) and approximately 8% growth in comparable-currency operating income. Coca-Cola also expects strong free cash flow of $8 billion for 2020, which will easily allow it to continue paying its dividend.
Coca-Cola: Dividend Royalty
Not only is Coca-Cola on the list of Dividend Aristocrats, it also qualifies on the list of Dividend Kings. The Dividend Kings are an even more exclusive group of just 30 stocks that have each raised their dividends for at least 50 consecutive years. On February 20, 2020, Coca-Cola raised its quarterly dividend by 2.5%, to $0.41 per share.
The company has maintained such an impressive streak of annual dividend increases thanks to its world-class brand and recession-resistant business model. Coca-Cola is one of the world’s most widely recognized and valuable brands. According to Fortune, Coca-Cola is the world’s #6 most valuable brand, with an estimated brand value of $59.2 billion. This means consumers naturally gravitate to Coca-Cola’s products, giving Coca-Cola significant brand loyalty and also the ability to raise prices over time.
Plus, Coca-Cola products see steady demand, even during recessions and times of uncertainty. Even in the recent coronavirus crisis, Coca-Cola’s sales are likely to hold up extremely well. Multiple states have declined shelter-in-place orders. Consumers have responded by stockpiling household items, including Coca-Cola products.
As a result, Coca-Cola is simply a cash machine. Cash flow from operations was up 37% year-over-year to $10.5 billion in 2019, while full-year free cash flow increased 38% to $8.4 billion. Such a high level of cash flow generation allows Coca-Cola to return increasing amounts of cash to shareholders each year.
Shares of Coca-Cola have bounced off their worst levels, but still remain down 11.5% to start 2020. Investors might consider this to be a buying opportunity, as the stock price decline has pushed up Coca-Cola’s dividend yield to 3.5%. This is an attractive yield for income investors, especially due to the low interest rate environment.
The Federal Reserve recently cut its benchmark Fed Funds rate to zero in response to the economic slowdown, which puts income investors in a difficult position. The S&P 500 Index yields just 2.1% on average right now, meaning Coca-Cola is an above-average stock for dividend income.
The S&P 500 has posted a decline so far in 2020, and the outlook for the remainder of the year is highly uncertain, as the U.S. economy may be on the verge of entering a recession. While Coca-Cola stock is not immune from a recession, it should continue to pay its hefty 3.5% dividend yield and raising the dividend each year. Thanks to a long history of steady dividend increases each year and a solid 3.5% current yield, Coca-Cola is a recession-resistant stock for dividend growth investors.