Coca-Cola’s stock is about to split. This might be a good time to pour yourself a glass of one of the world’s premier dividend payers.
Coke has increased its dividend for 50 consecutive years, including an 8.5-per-cent hike announced in February. Based on the current annual dividend of $2.04 (U.S.) and Tuesday’s closing price of $80.80, the stock yields 2.5 per cent.
While that won’t make you rich overnight, it’s higher than the S&P 500’s yield of about 2.1 per cent. What’s more, Coke’s dividend has been growing at a nice clip, rising an annualized 8.6 per cent over the past five years, according to Bloomberg.
And there’s every reason to believe that trend will continue as the world’s largest soft drink maker spends heavily to bolster its brands around the world, particularly in fast-growing emerging markets.
“Very importantly, Coca-Cola continues to make key investments to drive future growth of its business,” Odlum Brown analyst Stephen Boland said in a recent note. “For example, the company recently announced that along with its bottling partners it is increasing its investment in India by an additional $3-billion through 2020.”
Such international investments are paying off. In the second quarter, Coca-Cola’s volume rose by 4 per cent worldwide, led by gains of 20 per cent in India, 9 per cent in Russia and 7 per cent in China.
Coke’s success hasn’t gone unnoticed by the stock market. The shares have risen about 20 per cent in the past year, prompting the company to announce a two-for-one split effective on Aug. 10.
A split by itself doesn’t add any economic value, but it is often a positive signal.
In a 1996 paper, David Ikenberry of Rice University studied the short and long-term returns of 1,275 U.S. companies that split their stock two-for-one from 1975 to 1990. He then compared their performance to companies that did not split. Result: The splitters outperformed the non-splitters by eight percentage points after one year, on average, and by 16 percentage points after three years.
There’s also evidence that a stock split is a predictor of earnings growth. According to a 2003 study of Canadian stocks from 1977 to 1993 by Said Elfakhani of American University of Beirut and Trevor Lung of San Diego-based First National Home Finance, “it appears that earnings grow in the two-year period following split events, thus implying that split events signal future performance of the firm.”
Such results shouldn’t be surprising. Companies that split their shares typically have strong underlying fundamentals. And the lower post-split price may attract more retail investors, who give the stock a further boost.
Even without the coming split, Coca-Cola has a lot of things going for it as an investment, including:
-Dominant brands such as Coca-Cola, Diet Coke, Sprite, Fanta and hundreds of others;
-A distribution system with massive global reach;
-A strong balance sheet;
-High profit margins;
-Growing free cash flow to fund dividends and share buybacks, which together totalled $8.6-billion in 2011.
No stock is without risks, of course. The soft-drink business is notoriously competitive, and the rising cost of high-fructose corn syrup – a key ingredient in Coke products – because of drought in the United States is a concern. So are attempts to regulate soft drinks, such as New York City’s move to ban sales of large-sized sugary beverages.
What’s more, the stock isn’t exactly cheap. After the recent run-up, Coke trades at a multiple of about 20 times estimated 2012 earnings. That’s up from a price-to-earnings multiple of 13 in early 2009, but down from a P/E of more than 50 in the late 1990s.
While the share price is impossible to predict, for buy-and-hold investors who want a growing source of income Coke will almost certainly hit the spot.
“We are projecting 8-per-cent earnings per share growth over the long term,” Edward Jones analyst Jack Russo said in a note in which he reiterated his “buy” rating. “We expect future dividend rate increases to be roughly in line with earnings per share growth.”