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Coca-Cola’s dividend is expected to rise by about 7 per cent annually over the next five years. (JOHN GRESS/REUTERS)
Coca-Cola’s dividend is expected to rise by about 7 per cent annually over the next five years. (JOHN GRESS/REUTERS)

YIELD HOG

Five reasons why you shouldn’t sell your Coke shares Add to ...

John Heinzl is the dividend investor for Globe Investor’s Strategy Lab. Follow his contributions here. You can see his model portfolio here.

The media have been full of negative stories about soft drinks in general, and Coca-Cola Co. in particular.

Coke’s fourth-quarter results were lousy. Consumers are getting more health conscious and shunning sugary beverages. The soft-drink industry as we know it is doomed.

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And so on.

The fact that Coke raised its dividend by 9 per cent on Feb. 20 received comparatively little attention. But as a Coke shareholder – I own the shares personally and in my Strategy Lab dividend portfolio – I certainly noticed.

The dividend increase underlines that Coke, for all of its short-term struggles, remains a great long-term growth story.

I’m not thrilled with Coke’s recent performance – the shares posted a total return of about 1.4 per cent over the past 12 months, compared with 25 per cent for the S&P 500 – but I’m not selling my shares.

Here are five reasons that I’m hanging on for the long run.

1. The dividend keeps rising

Coke has raised its dividend for 52 consecutive years, and it’s not about to stop now. After the recent increase, the stock yields 3.2 per cent – the highest since 2010. Now is no time to panic.

“The dividend increase signals management’s confidence in the direction of the business, and it is supported by the healthy cash flows the company is generating,” Edward Jones analyst Jack Russo said in a note to clients.

Given Coke’s conservative payout ratio of about 55 per cent of earnings, healthy free cash flow and solid balance sheet, Mr. Russo expects the dividend will climb by about 7 per cent annually over the next five years – roughly in line with expected earnings growth of about 8 per cent.

2. It quenches thirsts worldwide

Coke’s volume (measured in cases) fell 1 per cent in North America in the fourth quarter, hurt by a 3-per-cent slump in sales of carbonated soft drinks. But there were some positives in North America as well: Non-carbonated or “still” beverage volumes – including waters, flavoured waters, juices, teas and sports and energy drinks – rose 4 per cent.

The picture was brighter outside North America. Overall volume jumped 8 per cent in India, 5 per cent in China, 3 per cent in Japan and 6 per cent in Eurasia and Africa. International strength is important for Coke given that about 82 per cent of its operating profit comes from outside North America.

And there’s plenty of international growth left.

“A rising middle class, greater urbanization and increasing personal consumption expenditures in markets around the world will continue to drive greater demand for our beverages,” chief executive officer Muhtar Kent said in the fourth-quarter earnings release.

Nobody can compete with Coke’s brand strength. It controls 17 brands with sales of at least $1-billion – among them Coca-Cola, Diet Coke, Coca-Cola Zero, Powerade, Sprite, Minute Maid and Fanta – and has unparalleled marketing muscle and global distribution reach.

3. Results were better than they seemed

One drawback of being a global beverage behemoth is that currencies can negatively affect results. That’s what happened in the fourth quarter as Coke’s revenue and operating income both fell 4 per cent. However, excluding currency effects and “structural changes” (primarily the deconsolidation of certain bottling operations), revenues and operating income grew 4 per cent and 6 per cent respectively in the quarter. For the full year, after adjusting for one-time items and currency changes, earnings per share actually rose 8 per cent.

Focusing on short-term hiccups can be misleading. Coke’s long-term growth is still impressive: Net income for 2013 was $8.58-billion, roughly double the $4.35-billion it earned in 2003.

4. The stock is fairly priced

Coke’s shares are trading at a trailing price-to-earnings multiple of 18.5 – below its average P/E of about 19 over the past three- and 10-year periods. Given Coke’s recent underperformance, a lot of bad news is already priced in and further downside may be limited. On the plus side, it’s possible that any sort of good news could provide a catalyst to the stock.

5. The company isn’t standing still

Coke is pouring an additional $400-million into marketing this year in a bid to reverse the soda slowdown. It’s also expanding its offering of still beverages and testing lower-calorie products such as Coca-Cola Life, which was launched in Argentina last year and uses a mixture of sugar and the plant-based sweetener stevia. Coke also recently bought a 10-per-cent stake in Green Mountain Coffee Roasters and plans to make its iconic soft drinks available in the company’s Keurig Cold at-home beverage system, expected in 2015.

Closing thoughts

Anything can happen to a stock in the short run. But long-term investors in Coke will almost certainly be rewarded with growing dividends for years to come. Do your own due diligence and remember that buying a U.S. stock exposes Canadian investors to volatility from fluctuations in the Canada-U.S. exchange rate.

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