The S&P 500 Dividend Aristocrats is a list of companies that have increased their dividends for the last 25 years straight. However, just because a company boosts its dividend regularly doesn't necessarily mean it's a good business to own. Sometimes a company will boost dividends to entice shareholders from selling even though it may constrain the cash flow needed to reinvest in the business.
A peek under the hood at the fundamentals of a few of these Dividend Aristocrats -- global beverage giant Coca-Cola (NYSE:KO), food distribution giant Sysco (NYSE:SYY), and the world's largest retailer Wal-Mart (NYSE:WMT) -- will bring the following Peter Lynch quote into perspective: "Investing without research is like playing stud poker and never looking at the cards." Here's why.
Declining soda demand and restructuring
Coca-Cola sells carbonated beverages such as its namesake soda, Sprite, and Fanta as well as noncarbonated drinks such as Minute Maid juice and Dasani bottled water. Coca-Cola brands number more than 500 according to its latest form 10-K. In 2013, Coca-Cola only reported an anemic 2% overall global volume growth. Its global sparkling beverage volume served as a drag, growing only 1% in 2013 versus 3% in 2012. Still beverages increased volume 5% globally in 2013 versus 10% in 2012. Coca-Cola definitely faces headwinds in the form of global market saturation and increasing consumer distaste for sodas. Also, the deconsolidation of Brazilian and Philippine bottling operations made a further dent into Coca-Cola's reported top- and bottom-line growth.
With that said, Coca-Cola's reported revenue and net income declined 2% and 5%, respectively, in 2013. However, it managed to grow free cash flow 1% due to a decline in capital expenditures versus 2012. Coca-Cola paid out 61% of its free cash flow in dividends to its shareholders during 2013 versus 58% in 2012. This payout ratio is starting to creep into the steep range. Of course, as this company faces more limited growth prospects, perhaps it should return more capital to shareholders.
The year 2014 marked the 52nd consecutive year of dividend increases for Coca-Cola; however, with the headwinds this company faces, you may wonder how long it can keep paying a dividend, much less increasing it. Coca-Cola saw some degradation on its balance sheet in 2013. While cash as a percentage of stockholder's equity increased from 41% in 2012 to 51% in 2013, its long-term debt increased a whopping 30%. As a result, Coca-Cola's long-term debt-to-equity ratio expanded from 44% in 2012 to 57% in 2013. As a result, its interest expense increased last year, choking out profitability.
Struggling client base
Sysco sells food products along with supplies and equipment to mainly industrial clients such as hotels, restaurants, and hospitals that prepare food for their customers or patients. Its top line fared better than Coca-Cola's. Sysco grew its year-to-date revenue 5% but net income has declined 2% so far this year. Its year-to-date free cash flow increased 64%. Sysco experienced margin pressure due to the struggles of its clients, most notably in the casual dining segment. The company's long-term debt-to-equity ratio registers at 56% slightly lower than Coca-Cola's. However, Sysco paid out 64% of its 2013 free cash flow in dividends. Sysco currently pays its shareholders $1.16 per share per year in dividends, resulting in a yield of 3.2%.
The bigger they are...
Wal-Mart operates more than 10,942 stores globally. According to the Bloomberg Industry Leaderboard, Wal-Mart commands a 67% market share in North America. However, the company ran into a great deal of trouble last year, including accounting incongruities with U.S. accounting principles in China, the termination of a joint venture in India, and customers losing buying power due to the loss of government benefits. Wal-Mart did grow its revenue 2% last year. However, its net income and free cash flow declined 6% and 18%, respectively. On Wal-Mart's balance sheet, cash and long-term debt-to-equity came in at 9% and 51%, respectively, and its long-term debt increased 9% last year. Wal-Mart paid out 56% of its free cash flow in dividends last year. Currently, the company pays its shareholders $1.92 per year, yielding 2.6%.
Things to look for
Look for Coca-Cola's struggles with soda to continue as people seek to eat and drink healthier. Over the long term, expect Coca-Cola to slowly shift its focus more toward non-sparkling beverages. Currently, 12 of Coca-Cola's most well-known brands fall into the non-sparkling category. Emerging markets and product innovation should fuel growth in its fundamentals and dividends over the next decade at least.
Expect Sysco to continue to struggle even as it tries to acquire its way out of trouble stemming from a volatile economy. A struggling client base may put its dividend yield at risk over the long term.
As for Wal-Mart, cash-strapped consumers, roadblocks on the international scene, and threats from e-commerce certainly cast doubts on its viability as a long-term investment. Its smaller store formats serve as a silver lining and may serve as a catalyst for small amounts of growth toward sustaining its current 2.6% dividend yield.
Feel free to add these companies to your Motley Fool Watchlist to track their progress over time.
William Bias owns shares of Coca-Cola and a share of Wal-Mart Stores. The Motley Fool recommends Coca-Cola and Sysco. The Motley Fool owns shares of Coca-Cola and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.