Dividend growth investing, or any buy and hold strategy for that matter, requires constantly reevaluating your positions and determining whether growth has stagnated and if your funds could be better invested elsewhere. Having said that, my plan moving forward is to reevaluate a company and post my thoughts following the payment of a dividend. If the fundamentals or future trajectory has changed for the worse, I will consider selling or taking earnings by reducing my position. This should also help me intimately know the companies within my dividend portfolio and make plus expected value decisions.
Coca Cola (KO) paid a quarterly dividend of $0.305 on 4/1/2014. Below are some thoughts surrounding the current condition of Coca Cola and whether or not I will maintain my position. Remember, these are just my thoughts. Please research and evaluate for yourself before placing any orders.
So far, year to date, the share price of KO has dropped 7.84%. I initiated my position near the 52 week low of $36.83 so I didn’t feel the full effect of that downturn. As for the dividend yield, it now stands at 3.20%. This continues to be a fairly respectable yield considering that PepsiCo, at the time of writing, has a yield of 2.74%.
In 2013 KO earned $1.90 per share while paying out a whopping $1.12 in dividends, which gives us a payout ratio of 58.8%. That’s pretty high and I would feel uncomfortable if it was any company. Coca Cola has over $20 billion in cash and other other short term investments (Green Mountain Coffee Roasters). Such a strong balance sheet should allow KO to maintain or improve upon its 5 year dividend growth rate of 8.37%. In fact, that comes out to $4.60 for each of the 4.4 billion shares, which is equivalent to 15 quarterly dividend payments at $0.305. Worst case scenario, we may still have a few quarters of dividends even if Coca Cola was to become unprofitable overnight.
Alright, now for the negative sentiments. There are a few things that do concern me. The primary one being the growing negativity surrounding the consumption of carbonated beverages. I would consider myself a proponent of general health, but from an investment standpoint this shift in consumer behavior does not bode well. However, it’s not like I’m the only one to realize this. Coca Cola has already begun to develop low calorie, sugar free and stevia sweetened products in an attempt to adapt with market conditions.
A Global Presence
Another concern surrounding KO is the global scale of it’s operations. With products in over 200 countries, Coca Cola is constantly under pressure from shifting currency valuations. A weak dollar can result in a quarter of lower international revenue and profits. However, on the flip side, a global presence allows strong growth in one currency to compensate for weakness in another country’s currency.
For the 2014 fiscal year analysts are expecting earnings per share to reach $2.09, which represents an increase of 10% from 2013. Even though there are some risks, hitting that mark should alleviate some concerns surrounding the payout ratio and slowing earnings growth.
Knowing this, I remain confident in the future growth of my investment in KO and will continue to maintain a position. Obviously there are concerns, but adaptation to market conditions, a strong balance sheet and continued earnings growth outweigh the negatives in my opinions.
Full Disclosure: Long KO