To be considered a Dividend Aristocrat, a company must boast a history of at least 25 consecutive years of uninterrupted dividend growth. Coca-Cola (NYSE: KO), Procter & Gamble (NYSE:PG), and Wal-Mart (NYSE:WMT) are not only part of that select group, they are also included in Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) portfolio.
When it comes to fundamental quality, being a Dividend Aristocrat and also a Warren Buffett stock provides a double seal of approval, so let's take a look at these dividend powerhouses and why they merit long-term investments.
Serving approximately 23 million outlets in more than 200 markets across the world, Coca-Cola is the undisputed global leader in soft drinks. The company owns a remarkably powerful portfolio featuring 17 brands making more than $1 billion each in global revenues, in addition to 20 additional brands generating sales of between $0.5 billion and $1 billion per year.
Coca-Cola is facing considerable headwinds, as consumers in big markets, including the U.S., are cutting back on soda consumption due to health concerns. In this context, global sales volume increased only 1% during the last quarter.
But Coca-Cola is betting on a growing portfolio of still drinks to adapt to changing consumer habits. With 11 billion-dollar brands in still drinks, Coca-Cola is the volume leader in the category. According to management, Coca-Cola has gained or maintained value share in still drinks over the last 29 consecutive quarters, so the trend looks quite healthy for Coca-Cola in this promising segment.
The company has a rock-solid trajectory of dividend growth; Coca-Cola has increased dividends over the last 52 consecutive years. Coca-Cola produced $6.4 billion in free cash flows over the nine-month period ended in September, and dividend payments absorbed only $2.7 billion of that money.
The dividend yield stands at 2.9%, and everything seems to be indicating that Coca-Cola will continue increasing dividends for years, and even decades, to come.
Procter & Gamble
Procter & Gamble is on its way out from Berkshire Hathaway's portfolio. Berkshire is purchasing Duracell from Procter & Gamble via a stock swap: Berkshire Hathaway is getting full ownership in a recapitalized Duracell in exchange for its Procter & Gamble shares, worth approximately $4.7 billion at current prices. This suggests that Warren Buffett prefers Duracell over Procter & Gamble, but let's remember that the Oracle of Omaha is saving massive amounts of money in taxes by structuring the deal as a stock swap.
Dividend investors have strong reasons to hold on to their Procter & Gamble shares, as the company is one of the strongest and most reliable dividend payers around. Procter & Gamble has consistently increased dividends over the last 58 years in a row, and it has the strength to sustain dividend growth in the long term.
The company owns 23 billion-dollar brands across different consumer staples category, and management is streamlining the portfolio to better focus on its most promising names. Procter & Gamble will be selling between 90 and 100 of its smaller and underperforming brands, which should mean higher growth and superior profitability for the company after the restructuring.
In the third quarter of 2014 Procter & Gamble delivered more than $2.8 billion in free cash flows, and the company allocated $1.8 billion to dividend payments. The dividend yield is in the neighborhood of 2.8% at current prices.
Wal-Mart has a clearly defined competitive strategy based on offering "everyday low prices," as opposed to temporary discounts on specific items. The company is focused on keeping operating costs as low as possible and leveraging its scale to negotiate convenient purchase prices with suppliers, many of which have Wal-Mart as their main and only client.
Since Wall Mart strives to provide aggressively low prices, margins on sales are razor-thin. However, the company compensates this drawback with colossal sales volume and a rapidly turning inventory.
Wal-Mart is the biggest retailer in the world; this has huge advantages in terms of scale and competitive strength. On the other hand, it can be challenging for a company of Wal-Mart's size to find growth opportunities when operating in a stable and mature industry such as retail.
Management is betting on e-commerce and smaller-format stores to improve performance, and there are some encouraging signs in these areas. Online sales surged 21% on a constant currency basis during the last quarter, and sales in the Neighborhood Market division increased by a healthy 5.5%.
Wal-Mart has raised dividends for 41 years in a row, and dividend payments consumed a conservatively low 64% of free cash flows over the nine-month period ended in September. At current prices, Wal-Mart stock pays a dividend yield of 2.2%.
Andrés Cardenal owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, and Procter & Gamble. The Motley Fool owns shares of Berkshire Hathaway and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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