I’ve been dividend investing for over 10 years. The iconic Coca-Cola company has yet to enter the dividend stock portfolio. Coca-Cola has been around for almost 130 years and this company has weather all financial storms, such as COVID-19, Financial Crisis and even the Great Depression!
Time to see if Coca-Cola (KO) stock deserves a spot for your dividend investment portfolio! Could this be a dividend stock that adds to your passive income?
Coca-cola stock
Overall, the performance of Coca-Cola (KO) stock has been strong in the last 52 weeks. In fact, they are outpacing the S&P 500, as the S&P 500 is up only 23% over the last 52 weeks.
If you go back into 2017 through 2019, Coke was not a significantly strong performing stock by any means. Their stock during that time period was fairly flat, therefore, it’s nice to see Coca-Cola doing well right now.
Financially, Coke’s performance has been strong in 2021 through 9 months. Revenue was approximately $3.5B higher than 9 months of 2020. Earnings is significantly higher than 2020, and Coca-Cola has also maintained a significantly clean balance sheet. The balance sheet is clean because Long-Term debt is down and the current ratio is 1.50x! Therefore, Coca-Cola is very liquid.
Given Coca-Cola is doing well financially and the stock price has performed well because of it – is Coca-Cola a dividend stock to buy now?
coca-cola stock dividend analysis
As you know it’s time to review Coca-Cola with the Dividend Diplomat Stock Screener! Here, we focus on 3 main dividend stock metrics:
1.) Price to Earnings Ratio (P/E): We look for the price to earnings ratio < the S&P 500 and the competition.
2.) Dividend Payout Ratio: The preferred dividend payout ratio is < 60%. In fact, we believe the perfect payout ratio is between 40% and 60%.
3.) Dividend Growth Rate: Given we are dividend investing on our way to financial freedom, as we believe dividend income is the best source of passive income, we look at the 5 year dividend growth rate. In addition, we review how many years the company has increased their dividend.
1.) P/E Ratio: Coke has a price to earnings ratio, as of January 14th, of 25.23. This actually is lower than the S&P 500, which is mid-26 and is slightly lower than Coke’s biggest competitor – Pepsi (PEP). Pepsi’s P/E ratio is 26. Ever-so slight undervaluation for this dividend king.
2.) Dividend Payout Ratio: Coke (KO) pays a dividend of $0.42 per quarter or $1.68 per year. Taking $1.68 over $2.43 in forward earnings, equates to a dividend payout ratio for Coca-Cola of 69%. This is above what we like to see, which is 60% at the highest level.
3.) Dividend Growth Rate: Coca-Cola has been increasing their dividend for 59 years. They are not just a dividend aristocrat (25 years) but Coke is also a dividend king (50 years)! However, the growth rate is low for Coca-Cola, as their average increase over the last 5 years is only 3.72%. The past year was a one-cent increase from $0.41 to $0.42 or 2.43%.
Lastly, we’ll take a look at the dividend yield. As an investor, you want to know how much owning this dividend stock pays you now! The yield for Coca-Cola is 2.74%, which is approximately 2x the S&P 500, no doubt.
Is coca-cola a dividend stock to buy?
Now that we’ve gone through the metrics, is Coca-Cola a stock to buy for the dividend stock portfolio?
There are strong positives about Coke stock. The price to earnings ratio is okay, the dividend growth history is impressive but there are a few downsides.
The negative factors for Coca-Cola come down to the higher dividend payout ratio. This high dividend payout ratio also correlates to the lower dividend growth rate we have seen from KO.
I’ve always wanted to own this dividend growth stock, one that Warren Buffett has loved forever, but I have a few reservations right now.
To start, the stock price is just a tad too high. They’ve outpaced the S&P 500, with a higher P/E ratio. In addition, the dividend growth rate currently does not outpace the rate of inflation, which is at near-highs. The inflation rate is well over 6% to 7% at the moment. Further, I do not see growth rate increasing in the near-term, based on the high dividend payout ratio.
Therefore, I will not be buying Coca-Cola stock at this time, sadly. I’ll continue to monitor this stock and if the price comes down or if earnings grows faster than the share price, I’ll re-look at KO stock.
If you head over to our YouTube channel, you’ll find other undervalued dividend growth stocks that are higher on my list for stocks to buy now!
How about you? Do you own Coke stock? Do you think Coke is a stock to buy now in this all-time-high stock market? Share your comments and feedback below!
As always, thanks for stopping by, good luck and happy investing!
-Lanny