Are Coco-Cola (KO) Dividends Sustainable?

Coca-Cola Company (NYSE:KO) recently announced a dividend increase of 5.7% to $0.37 per share, representing a 45th consecutive year of dividend increase. Following the latest dividend increase, its dividend yield stands around 3.4%, higher than the industry average of 2.8%. KO’s stock was always considered as a solid investment for defensive investors and retirees, supported by its strong dividends and the potential to generate a sustainable growth in earnings and cash flows.

After lower than expected financial results in the last three years due to increasing competition, the company has made several important changes in its business structure to generate a sustainable growth in the coming years.

In the fourth quarter, Coca-Cola reached an agreement in China to refranchise its bottling operations. In addition, the company has also been trying to expand its presence in Africa. It also made key changes in its European operations and extended its transformation in Japan.

Consequently, KO generated strong financial performance in the final quarter of 2016, allowing it to raise quarterly dividend at a respectable rate. The company’s strategy of enhancing prices in the developed markets allowed it to offset macroeconomic pressures in its emerging markets. Its revenue increased 8% in North America, compared with the same period last year.

On the other hand, the company has also been supporting its margins through operational efficiencies and cost cuttings. Its operating margin increased almost 90 basis points for the full year, compared with the last year.

KO’s dividends appear completely safe considering its recent restructuring activities and strong cash generating potential. In 2016, Coca-Cola generated almost $6.5 billion in free cash flows, when its dividend payments accounted for $6 billion. In addition, the company seeks to generate a mid-single digit growth in sales and earnings this year, which could offer additional support to its cash generating potential.

KO’s share price also appears undervalued following a selloff of 7% in the last twelve months. Coke’s stock price currently trades around 23 times to earnings compared to the industry average of 24 times. Therefore, Coco-Cola shares offer a strong entry point for dividend investors after a recent dividend increase.

The author has no position in the above mentioned companies.

Alexander is an analyst for who specializes in index and commodity trading. His outlook is usually near-term to medium-term. He has over 10 years of experience in the financial industry and began his career at the dealing desk. Alexander holds a Bachelor’s degree in Economics from University of Delaware.