Coca-Cola: Dividend Dynamo or the Next Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Coca-Cola (NYSE: KO  ) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Coca-Cola is a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Coca-Cola yields 2.7%, a bit higher than the S&P's 2%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

Coca-Cola's payout ratio is a modest 25%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- a ratio less than 5 can be a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's see how Coca-Cola stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage

Coca-Cola 87% 13 times
PepsiCo (NYSE: PEP  ) 112% 10 times
Dr Pepper Snapple (NYSE: DPS  ) 116% 9 times
Hansen Natural (Nasdaq: HANS  ) 0% N/A

Source: S&P Capital IQ.

The three beverage stalwarts are able to carry a considerable amount of cheap debt because of their stability. Hansen Natural, the upstart maker of Monster Energy, doesn't carry any debt.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Company

5-Year Earnings-per-Share Growth

5-Year Dividend-per-Share Growth

Coca-Cola 19% 9%
PepsiCo 7% 12%
Dr Pepper Snapple 12%* 0%*
Hansen Natural 25% N/A

Source: S&P Capital IQ. *3-year growth.

All four of these beverage companies display strong growth credentials. But with the exception of the outlier energy drink maker, Coca-Cola exhibits the fastest growth of its peers, and, unlike Dr Pepper, it passes a good chunk of that growth along into dividend increases. 

The Foolish bottom line
With a decent yield, a modest payout ratio, a reasonable debt burden, and growth to boot, Coca-Cola exhibits a clean dividend bill of health. Though it'd be nice to see an even higher yield, I'd say the stock would qualify as a dividend dynamo. To stay up-to-speed on Coca-Cola's dividend progress, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of PepsiCo and Coca-Cola. Motley Fool newsletter services have recommended buying shares of PepsiCo, Hansen Natural, and Coca-Cola. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2012, at 11:36 AM, eddieflynn wrote:

    Dr pepper raised its dividend every year so far. They went from .15 quarterly to .25 quarterly on June 17, 2010 and now raised to .32 quarterly. So annually the last 3 years since DPS started giving dividends we've gone from .6 to 1.00 to 1.28 so you have 47% yearly growth on that dividend.

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