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For refreshingly steady growth, grab a Coke

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.

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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."

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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;

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-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."

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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