Can This Dividend King Outlast A Recession And Grow Its Payout For 7 More Years?

KO -0.91%

Key Points

• Coca-Cola has increased its dividend for 63 straight years.

• The global beverage giant generates durable and growing cash flows.

• Its already strong balance sheet is about to get even stronger.

• 10 stocks we like better than Coca-Cola ›

Coca-Cola (NYSE: KO) has been an extremely durable dividend stock over the decades. The global beverage giant has increased its dividend for 63 straight years. That more than qualifies it as a Dividend King, a company that has raised its dividend for 50 or more consecutive years. Coca-Cola continued to raise its payout despite numerous economic downturns throughout the years.

Here's a look at whether Coca-Cola can outlast a future recession and reach 70 years of dividend increases, a milestone only three other companies have currently achieved.

Coca-Cola's secret recipe for dividend growth

Only 56 companies currently meet the qualifications of being a Dividend King, underscoring the impressive performance of Coca-Cola over the years. The biggest factor contributing to the company's consistent growth is the durable and steadily rising demand for its growing portfolio of refreshing beverage products. Coca-Cola owns about 200 brands that it sells across more than 200 countries and territories, including 30 brands that generate over $1 billion in annual sales. Notable brands include Coca-Cola, Sprite, Dasani, Gold Peak, and Minute Maid.

Coca-Cola benefits from organic growth drivers such as volume growth and price increases. The company also routinely launches new products. It invests heavily in marketing, productivity improvements, product innovation, and other areas to drive healthy organic revenue growth rates. Over the past five years, Coca-Cola has delivered an average organic revenue growth rate of 9%. Its global beverage portfolio generates robust and durable cash flow, providing the company with the funds to pay a rising dividend and invest in expanding its operations.

The company also routinely acquires new beverage products. Since 2016, acquisitions such as Topo-Chico and BodyArmor have driven a quarter of its earnings-per-share growth.

Coca-Cola also maintains a strong balance sheet. It has an A+/A1 bond rating, giving it lots of financial flexibility. The company has significantly enhanced its financial flexibility over the past decade by refranchising its bottling operations. That strategy provided it with cash to repay debt, make strategic acquisitions, and repurchase shares.

As durable as ever

Coca-Cola's strategy to refranchise its bottler operations has significantly strengthened its balance sheet. The company has driven its leverage ratio down toward the low end of its 2.0-2.5 times target range. As a result, it currently has the capacity to take on $12.6 billion of additional debt before it would reach the high end of its leverage ratio target range. That gives it a tremendous amount of financial flexibility to weather any future recession.

The company's already elite balance sheet should only grow stronger over the next year. Leading U.S. bottler Coca-Cola Consolidated recently agreed to purchase all the outstanding shares of its stock currently held by Coca-Cola. As a result, the beverage giant will receive a $2.4 billion cash infusion. Additionally, Coca-Cola agreed to sell 41.52% of its 66.52% stake in Coca-Cola Beverage Africa in a deal that valued the largest Coca-Cola bottler in Africa at $3.4 billion.

Meanwhile, Coca-Cola expects to continue delivering healthy organic revenue and earnings growth rates. The company invests over $2 billion annual into capital expenditures to support high-growth areas. These investments support the company's long-term growth model. Coca-Cola aims to organically grow its revenue at a 4% to 6% annual rate. That positions it to deliver 7% to 9% annual earnings-per-share growth and strong, growing free cash flow.

Coca-Cola can continue to supplement its strong organic growth rate by making additional acquisitions. Its top-notch balance sheet gives it an enormous amount of financial flexibility to capitalize on future acquisition opportunities as they arise. Future deals could help further enhance the company's already healthy organic revenue and earnings growth rates.

This Dividend King should continue to reign supreme

Coca-Cola's global beverage portfolio produces durable cash flows. The company also has a strong balance sheet. These features put the company in an excellent position to outlast the next recession and continue increasing its dividend. It should be able to grow its payout over the next seven years to reach the rare milestone of a dividend septuagenarian. That makes it an ideal dividend stock to buy and hold.

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Matt DiLallo has positions in Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Can This Dividend King Outlast A Recession And Grow Its Payout For 7 More Years? was originally published by The Motley Fool