I Recently Bought This Classic Dividend Growth Company:
I’m very happy to finally own a small piece of one of the most popular dividend growth stocks that exists: Coca Cola (KO). No introduction is needed for this massive manufacturer, distributor, and marketer of beverage concentrates and syrups. This company has had over 50 years of dividend increases, and you can find one of their many billion dollar brands in almost every corner of the world. Coca Cola always seems to trade with a premium valuation, and I’ve been waiting for shares to drop in price for quite a while. Now finally seems like a good opportunity to slowly build a position in my commission free Loyal3 account. Here are my recent transactions:
I now own 23 different businesses in my portfolio, and each one provides me with growing dividend payouts every single year. My total investment cost was just $364 and it bought 8.9937 shares which will add $11.87 to my 12 month forward dividends for a new total of $1,700.62. The current dividend yield of 3.3% is flirting with its 5 year highs of 3.5% set way back in 2010.
The current price to earnings (P/E) on sites like Google and Yahoo finance seems high at around 25; however, Dividend Mantra at Daily Trade Alert rightly attributes that to temporary weak earnings and currency conversions, in his article “This Dividend Growth Stock Could Offer 16% Potential Upside.” A recent Fast Graph shows a current blended P/E of 19.9 with a normal 20 year P/E of 26.9.
Shares were way overvalued in the late 1990’s, peaking at a P/E of over 60 in the middle of 1998, which is why the normal 20 year P/E is so outrageously high.
If we reduce that 20 year P/E span to only the past 12 years, which doesn’t include that extreme overvaluation, we see a normal P/E of 20.1. This could imply that we’re right around fair value at today’s prices.
The current headwinds Dividend Mantra pointed out have also inflated the current payout ratio to above 80%, which is uncomfortably high, but again that should start to normalize in the coming years. The company recently raised their dividend by 8.2% and has had a 12 year dividend growth rate of 9.9%. You can see how the dividends will easily continue to rise based on this cash flow graph and 10-year earnings yield estimates:
Coke has come under fire for several other reasons lately including a massive shareholder outcry about the CEO’s 23% raise in compensation in 2014 despite unimpressive earnings growth over the past few years. We also constantly hear that the United States is backing away from sugary sodas which have declined in volume for 10 years straight, but coke owns so many profitable non sugary brands in its very diverse portfolio including teas, vitamin drinks, and plain old water. They also have the cash to acquire even more popular and trending products like its current sizable investments in Keurig Green Mountain (GMCR), Monster Beverages (MNST) and whatever else might come in the future. I just can’t picture a world 10 years from now that doesn’t include Coca Cola still growing in some way. I hope the price continues to slide from here so I can keep building this position.
What do you think of Coca Cola (KO)? What are you buying lately?