Coca-Cola’s Increased Dividends Raise Payout Ratio Fears


Coca-Cola just announced its annual dividend hike on the third Thursday of February, as it has done for quite some time. I also examined the company’s latest earnings with an emphasis on dividend coverage based on free cash flow. Now that the company has announced its 61st straight annual dividend increase, it is a good time to look back at the stories.

I anticipated a dividend increase of 5% to 46.20 cents, but Coca-Cola only increased its payout by 4.50% to 46 cents. Not bad at all. Again, this indicates nothing about my ability to foresee but a great deal about the company’s dependability. In other words, retirees may (and have) accurately estimated and counted on Coca-Cola’s annual dividend hikes to the day and cent if they studied history and recent financial data. Let’s see how this increment affects the numbers.

The current number of outstanding shares is 4.32 billion. The new quarterly dividend per share is 46 cents.
This would represent a quarterly commitment of $1,998 billion for dividends (4.325 billion shares times 46 cents). Coca-Cola’s free cash flow [FCF] has been relatively stable, especially when comparing each quarter year-over-year. Yet, you are about to be surprised.

For the most recent four quarters, the average quarterly FCF was $2.38 billion, representing a payout ratio of 83% ($1.989 billion divided by $2.38 billion). This metric has increased significantly since my evaluation of 2022, when the payout ratio based on trailing twelve-month FCF was 67%. This is somewhat worrisome, so I examined the five-year quarterly FCF average to ensure I’m not jumping to conclusions based on a single twelve-month period. With a five-year average of $2.19 billion, this is also not alarming. This corresponds to a payout ratio of 90%.

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If this were a different firm, I would be alarmed, but I am willing to give Coca-Cola the benefit of the doubt. Possibly the FCF figures for 2021 were significantly higher than usual due to COVID-related pent-up demand. So, a slowdown in 2022 is natural. In the following quarters, I will monitor FCF figures more attentively than in the past.

With forward earnings per share estimates of $2.58 per share, a new quarterly dividend of 46 cents per share would result in a payout ratio of 71%, the same as last year. Hence, this is a positive or at least neutral sign.
In conclusion, Coca-Cola has once again demonstrated its dependability by maintaining its yearly dividend hike to the exact date. FCF has decreased significantly compared to 2021, and this, combined with a rising dividend, has caused the payout ratio to exceed a comfortable level (for me). Nonetheless, a stable EPS-based payout ratio indicates the corporation likely reined in spending to improve shareholder returns.

This section examines the predicted yield on cost for an investor that purchases Coca-Cola today, assuming an annual dividend growth rate of 4%. Please do not make the mistake of laughing at Coca-Cola’s 3% yield after 61 years of dividend increases. It just means that the price of the stock has gone up over time to match its historical yield, which has rarely been higher than 3.50 percent.

When I calculated the FCF-based payment ratios, I was somewhat shocked, despite the fact that I am pleased with the near-5% dividend increase (both trailing 12 months and 5 year average). As of the time of writing, The Coca-Cola Company’s stock has a forward multiple of 23 due to a decline of around 6% year-to-date. I would propose waiting until the dividend yield reaches 3.30 percent, which, after the recent dividend increase, is roughly $56 per share. If inflation surprises keep happening like they did this morning, this day may not be too far away.

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