Coca-Cola's 2023 Dividend Increase: Payout Ratio Concerns

Georgiy Datsenko

Not that anyone is keeping scores here, but The Coca-Cola Company (NYSE:KO) has conscionable kept up my words to nan Seeking Alpha organization arsenic shown below, by announcing its 61st consecutive dividend increase. I was readying to not constitute anymore if I grounded connected this prediction, but acknowledgment to Coke, I tin proceed here. Just kidding.

Comments (Seekingalpha.com)

Jokes aside, I precocious previewed this expected yearly dividend increase. Staying existent to its reliability erstwhile again, Coca-Cola has conscionable announced its yearly dividend summation today, nan third Thursday of February arsenic it has done for a while now. I besides reviewed nan company's caller earnings, pinch a attraction connected free rate flow-based dividend coverage. Now that nan institution has announced its 61st consecutive yearly dividend increase, it is clip to revisit nan stories.

I projected a 5% dividend summation to 46.20 cents, and Coca-Cola has fixed retired a 4.50% summation to 46 cents. Not excessively shabby. Once again, that says thing astir my predictive abilities but a batch astir nan company's reliability. I mean, retirees tin (and have) safely foretell and count connected Coke's yearly dividend increases to nan time and cent if history and caller numbers are studied carefully. Let's spot really nan numbers look aft this increase.

• Current outstanding share count is astatine 4.325 Billion.
• The caller quarterly dividend is 46 cents per share.
• That would correspond a committedness of $1.989 Billion/quarter towards dividends (4.325 Billion shares times 46 cents).
• Coca-Cola's free rate travel [FCF] has mostly been consistent, particularly if you comparison each 4th YoY. But you are successful for a astonishment here.
• The mean quarterly FCF was $2.38 Billion utilizing nan astir caller 4 quarters, which would correspond a payout ratio of 83% ($1.989 B divided by $2.38 B). This number has gone up by rather a separator compared to my 2022 review, erstwhile nan payout ratio based connected trailing 12 months FCF was 67%. This is simply a small concerning and to beryllium judge I don't jump nan weapon based connected conscionable a azygous 12 period period, I looked astatine nan five-year mean connected quarterly FCF. That isn't sobering either arsenic nan five-year mean was $2.19 B. That would correspond a payout ratio of 90%.
• While I'd panic if this were a different company, I americium inclined to springiness Coca-Cola nan use of nan doubt. Perhaps nan 2021 FCF numbers were overmuch stronger than accustomed owed to COVID-related pent-up demand. Hence, a deceleration successful 2022 is natural. I'll beryllium watching FCF numbers successful nan upcoming quarters much intimately than I've done successful nan past.
• Using guardant net per stock projections of $2.58 per share, a caller quarterly dividend of 46 cents per stock would correspond a payout ratio of 71%, precisely wherever it was past year. So, this is simply a bully sign, aliases astatine slightest not a bad sign.
• In summary, Coca-Cola erstwhile again proven its reliability by sticking to its yearly dividend increase, down to nan day. FCF has declined considerably compared to 2021, and that, coupled pinch an expanding dividend, has pushed retired nan payout ratio beyond comfortable levels (for me). But EPS based payout ratio being dependable shows nan institution apt reigned successful connected expenses to make net amended for shareholders.

Coke FCF (Ycharts.com)

Extrapolation

This conception looks astatine nan projected output connected costs for personification buying Coca-Cola coming assuming a 4% dividend maturation complaint per year. Please don't make nan correction of looking astatine Coca-Cola's existent 3% output and laughing astatine really it tin beryllium truthful debased aft 61 years of expanding dividends. It only intends nan banal value has appreciated complete nan years to sync up pinch nan stock's based yield, which has seldom been supra 3.50%.

Extrapolation (Author)

Conclusion

While I americium happy pinch a adjacent 5% dividend increase, I was decidedly amazed erstwhile calculating nan FCF based payout ratios (both trailing 12 months and 5 twelvemonth average). The Coca-Cola Company banal has mislaid astir 6% YTD, and that gives it a guardant aggregate of 23 arsenic of this writing. That is still a spot excessively rich | for me, and I propose waiting till nan 3.30% people to buy, which aft nan caller dividend summation is astir nan $56 mark. That time whitethorn not beryllium acold disconnected if we get much ostentation related surprises for illustration nan 1 this morning.

Meanwhile, enactment diligent and bask a Coke if that is your taste. Even if Coke is not your taste, beryllium judge to watch nan Free Cash Flow pinch maine aft each net study if you are willing successful The Coca-Cola Company stock.

Dividends (DGI and DRIP) and Growth astatine reasonable value (GARP) for Long-term. Serious money.Fun trading for short-term. Play money.Ideas and thoughts presented successful nan articles are not master recommendations.