When executed properly and given enough time, dividend growth investing can produce tremendous results. This is because only the best businesses on the planet can deliver payout growth to shareholders year after year and decade after decade.
Berkshire Hathaway's purchase of 400 million shares of the beverage juggernaut named Coca-Cola (KO 0.44%) between 1987 and 1994 serves as a reminder of the power of this investing strategy. The Warren Buffett-led holding company's $1.3 billion investment into Coca-Cola now pays more than $700 million in annual dividends, which is a staggering 50%-plus yield on cost.
Let's dig into three reasons why Coca-Cola could remain a buy for dividend growth investors.
NYSE: KO
Key Data Points
1. Net revenue and earnings are still growing like clockwork
Coca-Cola sells its household name brands in over 200 countries and territories around the world. These include Sprite soda, Smartwater distilled bottled water, and Fairlife ultra-filtered milk. This immense brand power positions Coca-Cola as the leader in the sparkling soft drinks, juice, dairy and plant, water, enhanced water and sports drinks, and ready-to-drink tea and coffee beverage categories.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Organic revenue growth rate (YOY) | 18% | 12% |
Data source: Coca-Cola Q1 2022 earnings press release and Coca-Cola Q1 2023 earnings press release. YOY = Year over year.
The company recorded $11 billion in net revenue during the first quarter (ended March 31), which was up 5% over the year-ago period. Coca-Cola implemented price hikes, which provided an 11% lift to its net revenue for the quarter. And because the company's brands are a regular part of countless millions of consumers' daily routines, unit case volume rose by 3% in the quarter. Rising demand for syrup from authorized bottlers contributed 1% to Coca-Cola's net revenue growth during the quarter.
Unsurprisingly, the company's global presence, coupled with a robust U.S. dollar, weighed on net revenue to the tune of 6% for the first quarter. Along with a 1% dip in net revenue stemming from the divestiture of a bottler in Egypt last year, this explains Coca-Cola's mid-single-digit topline growth in the quarter.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Net margin | 26.6% | 26.8% |
Data source: Coca-Cola Q1 2023 earnings press release.
The Georgia-based company reported $0.68 in non-GAAP (adjusted) diluted earnings per share (EPS) during the first quarter, which was a 6.3% year-over-year growth rate. Cost management helped the company's non-GAAP net profit margin expand by over 10 basis points for the quarter. Combined with a 0.3% reduction in Coca-Cola's diluted share count, this is how adjusted diluted EPS growth outpaced net revenue growth in the quarter.
The company looks poised to deliver similar adjusted diluted EPS growth in the future. Analysts anticipate that additional product launches and acquisitions will lead to 5.8% annual adjusted diluted EPS growth over the next five years.
Image source: Getty Images.
2. Six decades of dividend growth is just the beginning
Income investors will be pleased to learn that Coca-Cola's 2.9% dividend yield is meaningfully more than the S&P 500 index's 1.7% yield. And in even better news, the company appears positioned to build on the 61-year dividend growth streak that makes it a Dividend King.
It is projected that Coca-Cola's dividend payout ratio will come in under 71% in 2023. After paying its dividend, the company should have the funds needed to invest in business growth, strengthen the balance sheet, and complete share buybacks. This is why I would be surprised if Coca-Cola doesn't hand out mid-single-digit dividend raises each year for the foreseeable future.
3. The premium valuation is well-deserved
Coca-Cola's business fundamentals seem to be intact. And while the stock isn't cheap at its current valuation, I believe the valuation has some room for further upside.
This is because Coca-Cola's forward price-to-earnings (P/E) ratio of 22.9 is only marginally higher than the non-alcoholic beverages industry's average forward P/E ratio of 22.6. Given its status as one of the highest-quality businesses in the world, this modest premium makes the stock a buy for dividend growth investors.
