Dividends and Brands Are a Powerful Combination

Coca-Cola, PepsiCo, Colgate-Palmolive, Nike, and Apple offer growing dividends supported by powerful brands, and this can be a powerful combination for shareholders.

Andrés Cardenal
Andrés Cardenal
Apr 4, 2014 at 9:01PM
Consumer Goods

Successful investing doesn't need to be too complex or sophisticated. On the contrary, investing in companies with valuable brands and growing dividends can be a simple and effective strategy for superior returns. Names such as Coca-Cola (NYSE:KO), PepsiCo (NASDAQ:PEP), Colgate-Palmolive (NYSE:CL), Nike (NYSE:NKE), and Apple (NASDAQ:AAPL) can be great candidates to consider for inclusion in a high-quality dividend growth portfolio.

Dividend aristocrats with renowned brands
Dividend aristocrats are a select group of companies that have proven they have the financial strength to deliver consistently growing dividends for shareholders for 25 consecutive years or more. Not surprisingly, many of the companies in this group are among the most popular and renowned consumer brands on the planet.

A differentiated brand can be one of the most powerful and sustainable sources of competitive strength. This allows companies such as Coca-Cola, PepsiCo, and Colgate-Palmolive to protect their profits from the competition and deliver consistently growing dividends for shareholders through the decades.

Coca-Cola is clearly the undisputed leader in soft drinks, and the company has an impressive portfolio including 16 other brands making more than $1 billion in sales on a global scale. This has allowed Coca-Cola to build one of the most impressive dividend growth track records in the market.

The company has raised its dividend payments for 52 consecutive years uninterruptedly, including a carbonated increase of 9% announced on Feb. 20. The stock pays a dividend yield of 3.2%, and Coca-Cola has a sustainable payout ratio below 60% of earnings.

Source: Coca-Cola

PepsiCo comes in behind Coca-Cola in carbonated drinks, but the company is second to none in the salty snacks market, where it enjoys a global leadership position. PepsiCo owns 22 brands generating more than $1 billion in annual revenues around the world, and the company has successfully expanded into healthier product alternatives with brands such as Tropicana, Quaker, and Gatorade, among others.

This means PepsiCo is well positioned to adapt to changing consumer trends as customers around the planet continue paying more attention to calories and other nutritional qualities of the food and drinks they consume.

PepsiCo announced a generous dividend increase of 15% in February. This was the company´s 42nd consecutive dividend raise, bringing the dividend yield to 3.2% at current stock prices. The dividend payout ratio is quite safe in the area of 58% of average earnings estimates for 2014.

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Colgate-Palmolive is a worldwide leader in oral care. The company does business in more than 200 countries, and produces more than 75% of sales in international markets. Management estimates that the company owns a global market share of 44.8% in toothpastes, 32.9% in manual toothbrushes, and 38.8% in mouthwashes.

Source: Colgate-Palmolive

A popular brand in a defensive business has allowed Colgate-Palmolive to deliver uninterrupted dividend growth for investors during the last 51 consecutive years in a row; this includes a 6% dividend hike for 2014. The payout ratio is below 50% when compared to earnings forecasts for the current year, and Colgate-Palmolive pays a dividend yield of 2.2%.

Young and growing dividends
Nike has a relatively shorter track record of dividend growth, with only 12 consecutive increases. However, the company has enormous potential to continue raising distributions in the years ahead. The payout ratio is only 32% of earnings, and Nike is arguably the leading brand in the global sports shoes and apparel market.

The company calls marketing expense "demand creation" in its financial statements, and this seems like an appropriate denomination in Nike´s case. The company has built unparalleled differentiation, while sponsoring many of the most popular athletes in different sports disciplines around the planet. This means superior profitability for Nike versus the competition.

Source: NIke

The dividend yield is quite modest at 1.3%, but the company has been rapidly raising distributions during the last few years, including a 14% increase announced in November of 2013.

Apple is the most valuable brand in the world according to Interbrand, and pricing power allows the company to generate stratospheric profit margins for shareholders, in the area of 30% of revenues at the operating level.

Apple has nearly $147 billion in cash and liquid investments o its balance sheet as of the end of 2013, and the company produced nearly $22.7 billion in operating cash flows during the quarter ended in December of last year.

The company reinstated its dividend in 2012, and raised payments by 15% in 2013. Considering Apple's comfortably low payout ratio around 28% of earnings, and its huge cash flow generating capabilities, investors have solid reasons to expect growing distributions in 2014 and beyond. Apple pays a dividend yield in the area of 2.2% at current prices.

Bottom line
When differentiated brand power produces growing cash flows over time, investors can find some materially profitable investment opportunities. Coca-Cola, PepsiCo, Colgate-Palmolive, Nike, and Apple are strongly positioned to continue rewarding investors with increasing capital distributions for years to come.