I've long enjoyed Coca-Cola (KO 1.31%) products. I'm also a big fan of companies that pay dividends, which the beverage giant does. Despite those factors, I have never owned shares of Coca-Cola.
That ends this June. Here's why I plan to buy my first few shares of Coca-Cola this month.
A great business
Coca-Cola is an incredible business. Despite facing a host of challenges in recent years, the company has continued to grow steadily:
Image source: Coca-Cola.
As that slide showcases, Coca-Cola has organically grown its revenue at a 7% annual pace over the past five years despite changing consumer tastes, a turbulent macroeconomic environment, foreign-currency fluctuations, and an increasingly competitive landscape. That has flowed down to the bottom line, as earnings per share have steadily risen while the company's free cash flow has surged.
This financial growth has enabled Coca-Cola to steadily grow value for its shareholders. While its stock hasn't consistently outperformed the broader market over shorter periods, it has proven that slow and steady still wins the race over the longer term:
Image source: Coca-Cola.
A great dividend
Coca-Cola's dividend is a big driver of its total returns. The beverage giant has increased its payout for 61 straight years. That puts it in the super-elite class of Dividend Kings, companies with 50 or more years of annual dividend growth. The company most recently increased its payout by 4.6% in February.
The payout currently yields around 3%, which is an attractive rate. It's almost twice the dividend yield of the S&P 500 (recently around 1.6%).
Meanwhile, that above-average dividend is on rock-solid ground. The company generates about $9.5 billion of free cash flow (after covering capital expenditures, or capex), which easily covers its roughly $7.6 billion annual dividend outlay. That leaves it with some excess cash to allocate toward other initiatives that grow shareholder value.
Coca-Cola further backs its payout with a very strong balance sheet, evidenced by its A-rated bonds. It currently has over $11 billion in cash and a low 1.8x leverage ratio. That's comfortably below its 2x to 2.5x target range. The company's cash balance and low leverage ratio give it lots of financial flexibility.
Coca-Cola's dividend is one aspect of its capital-allocation strategy. Coca-Cola also reinvests money to grow the business ($1.9 billion of capex planned for 2023), makes consumer-centric acquisitions as opportunities arise, and repurchases shares to at least offset the dilution of stock-based compensation (it repurchased $600 million more shares than it issued to employees last year).
The beverage giant's balanced capital-allocation strategy helps grow its earnings and free cash flow per share. That allows Coca-Cola to continue increasing its dividend.
A great dividend-growth stock
I'm filling my portfolio with dividend-growth stocks. That's because these companies have historically outperformed the market.
Coca-Cola certainly fits the bill. That's abundantly evident in its more than 60 years of consistent dividend growth.
While those past results are no guarantee of future success, there's reason to believe the company can continue growing its payout. It generates lots of cash and has an elite balance sheet. That gives it the flexibility to continue investing in expanding its business and dividend, which should enable it to deliver attractive total returns. That's the type of company I want in my portfolio, which is why I'm really excited to add Coca-Cola this month.
