Stocks that are able to raise their dividends for decades on end only reach that point by providing goods and services that are in high demand. Steadily growing dividends require growing sales and profits.
The stocks with at least 50 consecutive years of dividend growth are known as Dividend Kings. While 39 stocks qualified as Dividend Kings as of early 2022, there are just 11 that have at least 60 straight years of payout increases.
The mega-cap beverage stock Coca-Cola (KO 1.50%) recently became a member of the six-decade dividend growth club with a 4.8% increase in its quarterly payout per share last month to $0.44.
But should income investors buy the stock right now? Let's dive into Coca-Cola's fundamentals and valuation to find out.
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Brand power is leading revenue and earnings higher
Coca-Cola posted double-digit revenue and non-GAAP (adjusted) earnings per share (EPS) growth in 2021.
The company reported $38.7 billion in net revenue during 2021, which represents a 17.1% growth rate over the year-ago period. And more appropriately, Coca-Cola's net revenue in 2021 was up 3.7% over the pre-pandemic year of 2019.
Coca-Cola was able to produce such strong net revenue growth in 2021 for two primary reasons.
First, the company boasts a portfolio of approximately 200 leading brands, including the eponymous Coca-Cola, Powerade, Dasani, and Minute Maid, that are sold in over 200 countries and territories throughout the world. Since the company's brands are embedded into many people's daily life, this gives it a tremendous amount of pricing power. As a result, price hikes contributed to 6% of the company's net revenue growth in 2021.
The other factor that pushed Coca-Cola's net revenue higher was an 8% year-over-year increase in the company's unit case volume, which was ahead of 2019. This is because the rollout of COVID-19 vaccines led many consumers to return to away-from-home channels of consumption like restaurants and theme parks. Coca-Cola greatly benefited from this development because the company has a higher market share compared to its peer PepsiCo (PEP 3.62%) in away-from-home consumption.
Coca-Cola's adjusted EPS surged 19% higher year over year to $2.32 in 2021. Even making the pre-COVID comparison, the stock's adjusted EPS jumped 10%. Coca-Cola's higher revenue base and a 50-basis-point improvement in non-GAAP net margin to 26.1% were the two elements that drove up its adjusted EPS growth during the year.
Thanks to its top-notch beverage portfolio, analysts anticipate that Coca-Cola's adjusted EPS will compound at a 7% annual rate through the next five years.
The payout remains secure
Coca-Cola's growth outlook remains decent for the foreseeable future. Along with a reasonable dividend payout ratio, this makes the stock's market-beating 2.9% dividend yield quite safe.
Coca-Cola's dividend payout ratio was 72.4% in 2021. This allows it to retain enough capital to pay down debt and complete bolt-on acquisitions to keep revenue and earnings moving higher. That's why I expect Coca-Cola's dividend growth to remain around 5% to 7% annually for the foreseeable future. This is a satisfactory blend of yield and growth potential for a stalwart like Coca-Cola.
A financially healthy business
Coca-Cola also seems to be a financially sound business as well, which is evidenced by its net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio.
Coca-Cola's net debt-to-EBITDA ratio improved from 2.68 in 2019 to 2.40 in 2021. This was a combination of higher EBITDA and a reduction in net debt from $31.6 billion in 2019 to $30.1 billion in 2021. For context, the stock's net debt-to-EBITDA ratio is now better than the soon-to-be Dividend King PepsiCo. Analysts anticipate Coca-Cola's net debt-to-EBITDA ratio will be reduced even further to 1.84 by 2024, which would make the stock a financial fortress.
The stock appears fairly priced
Despite Coca-Cola's 3% year-to-date increase in its share price, the stock still looks like a buy for income investors at this time.
That's because Coca-Cola trades at a forward price-to-earnings ratio of 22.9, which is just below the non-alcoholic beverages industry average of 23.3. While Coca-Cola's 7% annual earnings growth prospects are a bit lower than the industry average of 9%, the stock arguably deserves to trade in line with or slightly ahead of its industry because of its track record.
