Coca-Cola (KO 0.01%) is a rock-solid blue chip stock, and it has held up better than the broader market this year. Even after a 13% decline over the past month, shares of Coca-Cola are essentially flat over the past year, versus declines of some 16%, 18%, and 27% for the Dow Jones Industrial Average, S&P 500, and NASDAQ, respectively.
Coca-Cola is a defensive consumer staple stock with a solid dividend payout, so it's perhaps no surprise that it has weathered the storm better than the broader market. However, there is one cause for concern that investors should keep an eye on.
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Keep an eye on the king
The company has an incredible track record when it comes to paying out a growing dividend -- in fact, Coca-Cola has increased its annual dividend payout for 60 years in a row, making it a Dividend King. So the beverage giant is about as reliable a dividend stock as you'll find in the market today. However, there is one cause for concern that I am keeping an eye on when it comes to Coca-Cola and its dividend. That's the company's dividend payout ratio.
You calculate dividend payout ratio by dividing a stock's dividend by its annual earnings. This gives you a good idea of how safe a company's dividend is. While Coca-Cola's dividend is by no means under threat of being cut in the immediate future, its dividend payout ratio is getting higher than investors typically want to see. Coca-Cola pays out $1.76 a share in dividends annually. With earnings per share (EPS) of $2.20 over the past 12 months, Coca Cola now has a dividend payout ratio of 80% -- a little higher than the 75% or below investors generally like to see for a stable, mature company like Coca-Cola.
While this doesn't mean Coca-Cola can't pay out its current dividend, it does indicate that the company doesn't have a lot of wiggle room if EPS declines. I don't think that will happen, and it should be noted that Coca-Cola's EPS is projected by analysts to increase to $2.58 in 2023, but having the dividend account for this much of earnings could limit Coca-Cola's ability to increase its payout in the future, especially if future earnings fall short of that projection.
NYSE: KO
Key Data Points
End of the TINA era
There's one other aspect of Coca-Cola's dividend that investors would be wise to note. While Coca-Cola's dividend yield of 3.2% is above the market average, a dividend stock with a payout in this range has some more competition for investor capital than it did in years past. During the previous decade, when interest rates were historically low, income-seeking investors had few places to turn to for yield, and dividend yields as low as 2% became compelling.
Over the past few years, some observers called equities the "TINA" trade, as in "There Is No Alternative," because the equity market was the only viable place for investors to put their money and expect to earn a decent return. However, this dynamic has changed due to the Federal Reserve's series of drastic interest rate hikes, with Treasury bills now yielding a risk-free 4%.
This may attract some conservative or income-oriented investors who previously turned to Coca-Cola for its reliable payout and 2% to 3% yield.
Still a good, long-term holding
All of this said, I'm still bullish on Coca-Cola, and it can still serve as the bedrock of a long-term portfolio. This year's market downturn highlighted the fact that the company is a global powerhouse that has the defensive characteristics to hold up in any market environment, as Coca-Cola preserved its shareholders' capital far better than the broader indices.
The company has created tremendous value for shareholders for many decades, and analysts forecast Coca-Cola will grow earnings by 7% this year and 5% in 2023. However, it's always a good idea to keep an open mind and a watchful eye on the stocks we are bullish on, even ones with steadfast track records like Coca-Cola.
