In today's rip-roaring stock market, it's easy to get caught up with what's hot and overlook the milestones of consistent stalwarts. Coca-Cola (KO), one of the most well-known dividend-paying companies, just raised its dividend by 5.4% to a record high of $0.485 per share. The dividend is payable on April 1 to shareholders of record as of March 15.
Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) latest 13F filing came out on Feb. 14, and showed that the company still owns 400 million shares of Coca-Cola, its fourth-largest public equity holding. Here's why the dividend stock is worth buying now.
Image source: Getty Images.
A history of meaningful dividend raises
The $0.10 dividend raise is the largest nominal increase since Coke's $0.10 raise between 2014 and 2015. But because the dividend is higher today, the percentage increase is 5.4% compared to 8.2% 10 years ago.
|
Year |
Dividends per Share |
Year-Over-Year Increase |
|---|---|---|
|
2024 (projected) |
$1.94 |
5.4% |
|
2023 |
$1.84 |
4.6% |
|
2022 |
$1.76 |
4.8% |
|
2021 |
$1.68 |
2.4% |
|
2020 |
$1.64 |
2.5% |
|
2019 |
$1.60 |
2.6% |
|
2018 |
$1.56 |
5.4% |
|
2017 |
$1.48 |
5.7% |
|
2016 |
$1.40 |
6.1% |
|
2015 |
$1.32 |
8.2% |
Data source: Coca-Cola.
Still, this is the largest percentage increase Coke has granted since 2017 to 2018. A big reason why is revenue and earnings growth.
Surprisingly strong growth from Coke
It has been a challenging time for Coke and its peers, which have dealt with changes in consumer demand, supply chain challenges, and inflationary pressures. Yet Coke has shown impressive pricing power.
KO Revenue (TTM) data by YCharts
As you can see in the chart, Coke's earnings are now at a 10-year high, and its sales have improved dramatically. Over the last three years, Coke's revenue is up 37% and diluted earnings per share are up an even better 49%.
Coke's revenue is still down from 10 years ago, but the company has transformed from a low 20s operating margin business to a high 20s business. A big part of that is due to operational improvements, but it would be a mistake to overlook Coke's successful portfolio improvements and brand acquisitions, such as Topo Chico in 2017, Costa Coffee in 2018, and full ownership of BodyArmor in 2021.
All three deals expand beyond Coke's traditional soft drink business and provide the diversification needed to address evolving consumer preferences. There have been some hiccups along the way, namely with BodyArmor. But overall, Coke's management of new brands has been a success.
The ideal role player
Coke is staging a comeback, but the stock has underperformed the S&P 500 over the last decade, putting up a 110% total return (which includes dividends) compared to 228% for the S&P 500. Coke should have better returns as long as the fundamentals continue to improve.
But no matter what, Coke's dividend is there for investors to collect a reliable source of passive income. The dividend is arguably the most important element of the Coke investment thesis. It's one of the reasons why Berkshire Hathaway has held Coke stock for decades. To quote the Berkshire Hathaway 2022 annual letter:
In August 1994 -- yes, 1994 -- Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion -- then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow.
Coke is the perfect role-player stock in a diversified portfolio. It's not going to put up jaw-dropping capital gains, but it is going to fulfill a specific purpose and come through even in a bear market.
Coke is a buy
Coke has a 3.3% dividend yield compared to 4.2% for the 10-year Treasury . But between the two, I would say Coke is a much better choice. Coke's dividend is as reliable as it gets. Not as reliable as a risk-free rate from the U.S. government. But with Coke, you get to collect one of the most reliable payouts out there while also participating in the stock market.
The business is in its best shape in over seven years. The company wouldn't issue a dividend raise this large unless it were confident in its earnings growth and ability to build upon that raise. Meanwhile, the stock isn't terribly expensive, sporting a 24 price-to-earnings ratio, compared to just over 27 for the S&P 500.
All told, Coke blends a sizable dividend yield with a reliable business. It's the perfect dividend stock for risk-averse investors or retirees looking to supplement income in retirement.
