Coca-Cola (NYSE:KO) is paying a forward dividend yield of 2.78%, which is 2.01 percentage points above the United States 10-year Treasury yield at the time of this writing. As Coca-Cola's share price continues to outperform the S&P 500, income investors will need to ensure that the growth and sustainability of Coca-Cola's dividend mean it's a better company to own over the competition in the long term.

Let's look at the long-term outlook on Coca-Cola, determining if the share price increase of 29% over the last year is appropriate given the changes within the company.

Friends sharing a soda

Image source: Getty Images.

A profitable strategy

Coca-Cola's move toward smaller packaging and several acquisitions are showing success for the company. The operating margin has improved significantly, up from 23.1% in 2015 to 28.5% in 2019 -- a 5.4 percentage point improvement. Concerning top-line growth, Coca-Cola's sparkling segment grew 6% in 2019. However, total revenues have fallen from $44.3 billion in 2015 to $37.3 billion in 2019 as the company closes bottling facilities, divests underperforming brands, and restructures operations -- led by the decline in demand around sugar-based beverages. 

Two notable acquisitions Coca-Cola has undertaken to diversify away from the declining beverage segment involve the 2018 acquisition of Costa and the recent acquisition of fairlife in 2020. The $5.1 billion Costa acquisition has given Coca-Cola an injection into the growing coffee segment, as Costa operates in 30 countries. In addition, the fairlife acquisition in 2020 expands Coca-Cola's offerings into the nutrition shake and drinkable snack segment. Coca-Cola stated during the fourth quarter that the fairlife acquisition puts Coca-Cola into "one of the fastest-growing categories in the United States."  

Coca-Cola has launched hundreds of products over the last few years, with the majority of the products consisting of no-sugar or low-sugar, and the remaining concentration around waters, juices, and teas. The focus on a well-diversified portfolio of high-profit margin products is clearly working for Coca-Cola's profitability. However, will this continue to allow the company to increase the dividend?

Projecting strong growth in 2020

Looking into 2020, Coca-Cola expects to deliver 5% organic revenue growth during the fiscal year and 8% growth in operating income -- expecting more divestitures and acquisitions during 2020. Coca-Cola's earnings per share is expected to increase by 7% during the year, with a projection of $2.25 per share. 

Free cash flow -- the amount of money available after removing cash outflows -- for Coca-Cola increased 38% in 2019 to $8.4 billion, leaving room for dividend growth in the future if the company can maintain impressive free cash flow growth moving forward. Coca-Cola's forward dividend yield growth has underperformed Pepsi (NASDAQ:PEP) -- a rival snack and beverage company -- with a five-year compound annual growth rate (CAGR) of 5.57% against Pepsi's 8.41%.

Coca-Cola is currently paying a higher forward dividend yield of 2.89% over Pepsi's 2.77%. However, Pepsi has maintained a five-year revenue growth of 0.14%, while Coca-Cola's revenue has decreased by 4.12%.

Coca-Cola's forward price to earnings of 25.21 and the price to sales of 6.51 puts the company at a heavier valuation in comparison to Pepsi's forward price to earnings of 23.42 and a price to sales of 2.88. Investors purchasing a higher dividend yield with a heavy share price valuation demand consistent growth from Coca-Cola, which the company can deliver if it continues to produce results as in 2019.

A compelling company at a heavy valuation

Coca-Cola is among very few companies that have paid a growing dividend for 57 years, and that growth doesn't look to discontinue in the long term. Coca-Cola's share price is currently trading above Pepsi's valuation. However, there are several factors that make Coca-Cola a compelling company to own. As the company focuses on growing segments while benefiting from the global distribution network, there is a large potential for Coca-Cola to continue growing, benefiting shareholders with increased dividends and share repurchases while giving shareholders confidence that its dividend is sustainable for quite some time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.