As far as dividends go, there aren't many more dependable payouts than Coca-Cola's (KO -0.43%). The beverage giant has been boosting its dividend for 61 consecutive years, allowing it to easily surpass the requirement for membership in the exclusive club of Dividend Kings.
That impressive track record is an excellent reason for investors to expect continued annual hikes ahead for this payout. But just how safe is Coke's dividend? Let's take a closer look.
The market leader
Coke's dividend is ultimately supported by its business, which enjoys one of the strongest competitive moats on the planet. The company sells over 2 billion of the 64 billion servings of drinks consumed around the world each day. It owns five of the top six global soft drink brands, including Coca-Cola, Sprite, and Fanta. And Coke spends billions each year on marketing to support those leadership positions. All of this is to say that from a qualitative standpoint, Coke seems likely to continue growing its sales and annual earnings into the foreseeable future .
There are risks to that bright outlook, though. A product safety crisis could seriously harm the Coke brand, for example. And demand could be further pressured by public concern over key ingredients, like aspartame, used in many of its drinks.
Sparkling finances
Coke's finances are stellar and help illustrate how the company has been able to afford steady boosts to its dividend for decades. Gross profit margin is close to 60% of sales today. Operating profit last year was $11 billion, or 25% of sales. The dividend payment was $7.6 billion, for context.
Coke's dividend is also well covered by cash flow. Operating cash flow was over $11 billion last year, meaning the dividend payment was roughly 70% of Coke's cash production. The company maintains about $10 billion of cash on the books, adding more financial protection. Management is careful not to overextend the business through massive acquisitions, meanwhile, and has easy access to relatively low-cost debt.
A history of healthy dividend increases
Given these positive factors, it is highly likely that Coke shareholders will avoid seeing a surprise cut to their dividend payment. But what sort of growth can they expect from those steady annual raises?
Coke's previous two hikes were a 4.5% raise for 2023 and a 4.7% increase in 2022. The business is on track for solid earnings growth this fiscal year, as well, even though sales volumes have slowed in recent months. Rising prices are offsetting that pressure, helping keep profitability elevated. That's why the next dividend hike could be near, or slightly above, the 5% rate that investors have seen over the last several years.
Coke is not a perfect business, and its dividend is far from guaranteed. The stock has underperformed in recent years, after all. Yet income investors still love Coca-Cola because it combines a few factors that tend to generate market-beating returns over time. These include steady market share gains in an attractive industry, combined with a growing dividend payout.
You can choose, as famed investor Warren Buffett does, to simply collect those quarterly checks. Or you can automatically reinvest the dividends over time. Either way, you can feel confident in Coke's ability to keep raising its annual payout for many more years to come.
