Coca-Cola: Is This Dividend King on the S&P 500 a Buy?

Investing in blue-chip dividend stocks is an excellent way for investors to derive passive income, given that interest rates are near record lows. Generally, a dividend-paying company generates consistent profits, steady cash flows and may also be part of a mature industry. These companies have a wide economic moat and a loyal customer base increasing their ability to pay out excess profits to investors in the form of dividends.

These factors also make blue-chip dividend paying companies a less risky investment. One such stock that has a long history of dividend payments in beverage giant Coca-Cola (NYSE: KO). Also part of Warren Buffett’s portfolio, Coca-Cola offers investors a forward yield of 3.1% while generating predictable cash flows and robust profit margins. Let’s see if KO stock should be on the radar of dividend investors right now.

Coca-Cola stock is up 50% in the last five years

Let’s see how Coca-Cola has performed in recent years, compared to the S&P 500. In the last year, KO stock is up 10.8% and it has gained 50% in the last five years. Since October 2011, Coca-Cola stock has returned 121% to investors. Comparatively, the S&P 500 has returned 33.6%, 133% and 350% to investors in the last one-year, five-year and 10-year period respectively.

Coca-Cola is one of the most famous brands in the world and has a large portfolio of beverage products. Despite a challenging 2020, Coca-Cola generated $11.5 billion in free cash flow while its revenue fell to $33 billion last year from $37.22 billion in 2019. 

The free cash flow is an important metric as it provides investors insights into a company’s ability to maintain and even increase dividend payments. Further, a company can also choose to repay debt, reinvest capital to expand its business or buyback shares with the excess cash. One reason for Coca-Cola's stellar cash flow metrics is its pre-tax margin that averaged over 24% in the last decade.

Coca-Cola’s sales were impacted amid COVID-19 as several of its business avenues such as theme parks, restaurants, stadiums and theaters were shut. As economies have reopened this year, analysts expect sales to rise by 14.9% to $38 billion in 2021 and by 5.7% to $40 billion in 2022. Wall Street also expects Coca-Cola to increase its adjusted earnings at an annual rate of 10% in the next five years.

What next for KO stock?

Given the company’s forecasts and a market cap of $237 billion, KO stock is valued at a forward price to sales multiple of 6.2x and a price to earnings ratio of 24x which might seem steep for a mature business. But its revenue increase this year as well as earnings expansion might continue to benefit investors as analysts expect KO stock to touch $62 in the next 12-months. After accounting for its dividend yield, annual returns may be close to 20%.

Coca-Cola also has an enviable history of dividend increases. Its annual dividend per share has increased from $0.25 to $1.68 in the last three decades. In fact, Coca-Cola is a Dividend King that has increased payouts for 59 consecutive years.

A key driver of KO stock will be the company’s upcoming earnings results this week. Analysts expect Coca-Cola to report revenue of $9.75 billion and adjusted earnings of $0.58 per share in the September quarter. In case, Coca-Cola can beat consensus estimates and provide a better-than-expected guidance, the stock should gain significant momentum in the next trading sessions. 

The verdict

Coca-Cola is a stock that will help you generate inflation-beating returns over time, but it might struggle to outpace the S&P 500 consistently. Its low beta of 0.64 makes the stock extremely attractive to risk-averse investors right now.

Related: Should Blackberry Stock be a Part of Your Portfolio?

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