Investors searching for income are often drawn to companies that have a long history of dividend growth. Companies with multiple decades of dividend growth have managed to raise their payments to shareholders even through recessions.
Growing a dividend through one or more recessions over time shows that the company’s business is well run and its products are in demand even as the economy slows.
One company that we think is among the most recession-proof companies in the market is Coca-Cola (KO, Financial). Coca-Cola's dividend is attractive at 2.9%, and highly secure even in a recession.
Business overview and growth prospects
With a market capitalization of $230 billion and annual sales of $37 billion, Coca-Cola is one of the largest consumer staple companies in the world.
The company’s Coke and Diet Coke brands are two of the top selling beverages in the world. Coca-Cola also offers non-sparkling beverages in the categories of tea, dairy and coffee.
Despite its size, Coca-Cola is nowhere near done growing. The company sells more than 4,300 products around the world and launched 600 new products last year, with the majority of these launches being of the non-sparkling beverage variety.
The company has had to adjust to consumers becoming more health conscious about what they eat and drink. To help meet this trend, Coca-Cola launched more than 250 products that contained no sugar or low amounts of sugar.
Coca-Cola is a truly global company as only ~20% of its sales come from North America. The company has a presence in nearly every country, giving it size and scale that most competitors cannot touch. In fact, the company holds the top spot in 32 of its top 40 markets around the world.
Even there, Coca-Cola has room for growth as the company holds only about half of the global cold beverage market share. In hot beverages, a relatively new business, it controls just 1% of global market share. This gives Coca-Cola a long runway for growth in this product category.
This helps build a brand loyalty among consumers that allows Coca-Cola’s business to perform quite well during economic hardship. Consumers may cut back on large purchases like a new car in times of a recession, but they likely won’t stop purchasing Coca-Cola products.
Recession performance
This ability to maintain customers during a recession has prevented Coca-Cola from seeing the large fluctuations in earnings that many more cyclical companies have experienced. Listed below are Coca-Cola’s results for adjusted earnings-per-share before, during and after the last recession.
- 2007 adjusted earnings-per-share: $1.29
- 2008 adjusted earnings-per-share: $1.51 (17% increase)
- 2009 adjusted earnings-per-share: $1.47 (2.6% decline)
- 2010 adjusted earnings-per-share: $1.75 (19% increase)
- 2011 adjusted earnings-per-share: $1.92 (10% increase)
- 2012 adjusted earnings-per-share: $1.97 (2.6% increase)
While adjusted earnings-per-share did drop slightly from 2008 to 2009, Coca-Cola actually saw total profitability increase during the recession from peak to trough. The company’s adjusted earnings-per-share ramped up as the economies of the world exited the recession.
Dividend analysis
Coca-Cola's ability to thrive in the last recession shouldn’t come as a surprise to investors. Also not surprising is the company’s ability to raise its dividend every year. Coca-Cola has paid a continuous dividend since 1920 and has 57 consecutive years of dividend growth under its belt. This means that the company has seen six separate recessions and still increased its dividend throughout each one.
Coca-Cola’s history of dividend growth gives it one of the longest streaks in the market and qualifies the company as a "Dividend King." Dividend Kings are those companies with at least 50 years of dividend growth. There are only a handful of other companies that have a longer growth streak and only 27 total companies that have at least five decades of dividend growth.
Coca-Cola has increased its dividend with:
- Compound annual growth rate of 3.7% per year over the past three years.
- CAGR of 5.0% per year over the past five years.
- CAGR of 6.6% per year over the past 10 years.
More recently, the company increased its dividend by 2.6% for the 4/1/2019 payment. This is below the above growth rates, but shares offer a yield of 2.9%, which is above the average yield of 1.9%.
The company is expected to pay $1.60 in dividends-per-share in 2019. Using the midpoint for guidance, the company expects to earn $2.08 per share this year, resulting in a forward payout ratio of 77%. This compares favorably to the company’s five-year average payout ratio of 80%.
The expected payout ratio is elevated, but not to the point where we feel that the dividend is likely to be cut.
Many investors prefer free cash flow as a measure of dividend safety. Coca-Cola distributed $6.7 billion of dividends over the last year while producing $8 billion of free cash flow for a payout ratio of 84%. From 2015 to 2018, the company paid out $19.1 billion of dividends while generating $26 billion of free cash flow. This results in an average payout ratio of 73% over this period of time.
The free cash flow payout ratios are higher than we’d like to see, but not to the point where we believe a dividend cut is likely to occur.
Final thoughts
Coca-Cola is one of the most recognizable companies and operates in almost every country in the world. The company also has multiple growth levers to pull, such as non-carbonated and hot beverages.
Coca-Cola has experienced six recessions and still managed to increase its dividend through each. The earnings-per-share and free cash flow payout ratios are high, but Coca-Cola is a Dividend King for a reason. The company has shown that it can continue to offer annual dividend increases regardless of the economic environment. These qualities make Coca-Cola a stable dividend stock to keep holding even in a recession.
Disclosure: No positions
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