Coca-Cola Serves Up Attractive Dividend Growth

Sonia Vora: Coca-Cola is one of the most attractive dividend stocks in the beverage space, with a yield above 3%. The company has increased its dividend for the last 55 years, and its payout ratio has averaged above 60% over the last decade, indicating its commitment to returning cash to shareholders. We expect its dividend will average high single-digit growth over the next decade, which is comparable to its historical rate.

We think Coca-Cola's ability to return excess cash to shareholders partly reflects its wide economic moat, which has helped it generate excess returns on invested capital despite a decade of volume declines in the domestic carbonated soft drink market. The firm possesses substantial brand intangible assets, as its investments in product innovation and marketing have helped establish Coca-Cola as one of the most recognizable brands in the world, allowing for entrenched retail relationships and brand-loyal customers. We also believe the firm enjoys cost advantages stemming from economies of scale in beverage production and its unparalleled global distribution network.

We expect Coca-Cola's bottom line to strengthen further as it finishes refranchising its North American bottling operations and benefits from growth in higher-margin packaging sizes, allowing for continued shareholder returns.

Despite the attractive dividend yield, shares currently trade in line with our valuation, and we'd suggest investors await a larger margin of safety before building a position in the name.