Is Coca Cola A Good Dividend Stock?

Is Coca Cola A Good Dividend Stock? The Coca-Cola Company (KO) is legendary, and many investors like to put their money in stocks with well-known products. However, Coca-Cola has something else to recommend it – dividends.

Dividends are usually something that companies offer to attract investors when they don’t have high growth rates. A company like Walmart is a good example. They have mostly saturated their market and high amounts of growth are unlikely.

To attract investors who may otherwise chase higher returns from a different stock, this mature company pays a dividend. Think of it as sweetening the deal.

What is a Value Trap?

Value traps are the complete opposite. These are stocks that offer a high dividend to attract investors, but they offer very little value besides. For instance, a brand-new company that offers a dividend could be a value trap. A company that pays a dividend when it is in financial trouble could also fall into the value trap category.

In both examples, those companies are incentivizing investors without offering any other rationale for investment. There is a chance the company in question pulls it off, but the risk that it flops is fairly high, especially since it is paying out some of its cash as dividends.

Is Coca Cola Dividend A Value Trap? 

Coke doesn’t fit any of the characteristics of a value trap. This company pays a dividend and it has a strong record of doing so.

KO has increased its dividend every year for 58 years, and there are many reasons to love this stock for your portfolio. Coke is a giant. Its products are in over 200 countries.

Coke focuses solely in beverages and owns some of the world’s most popular brands. All told, Coke’s portfolio includes more than 500 beverage brands.

In addition to the Coca-Cola family of products (e.g., Coca-Cola, Diet Coke), KO counts Sprite, Costa coffee, Dasani water, Gold Peak tea, Honest tea, Minute Maid juices, Powerade sports drinks, and Vitaminwater amongst its brand assets. 

Why Buy Coca Cola Stock? 

That said, Coke has been deeply impacted by the COVID pandemic. While the company issued a statement in April saying that they do not anticipate a disruption in production or distribution, the company is in a precarious situation.

Consumption has started to go back up since COVID hit, but it still isn’t at the level of previous years. Limits on crowd sizes and the closing of many outlets will impact sales.

Also, with fewer people out and about, there are less opportunities for impulse sales. Stadiums, movie theaters, restaurants, bars, and more were closed – some still are.

Approximately half of Coke’s soft drink sales come from these revenue streams. It adds up.

The company had strong results in 2019 and it was on-track to achieve its targets for 2020. KO increased its revenue, operating income, and free cash flow – but COVID killed that.

Coke is hopeful that it will get back on track as the situation resolves. It is focusing on core brands and finding ways to support its supply chain.

The company is focusing on managing its cost base and trying to get the highest return on the internal investments it makes. It is also looking at digital promotions and packaging that fits online sales as well as grocery e-delivery.

To further weather the storm presented by the COVID pandemic, Coke instituted a $5 billion debt offering and has $9 billion in credit available. The company also secured an additional $3 billion in bank loan commitments.

Coke has been around so long that it has actual experience in handling economic downturns and crises, and that may help it bounce back.

The company has diversified revenue streams and roughly 30 million customer outlets worldwide. Moving forward, KO is focusing on moving to a value-centric approach from a volume-oriented one and emphasizing its core business.

To this end, the company will get rid of its “zombie brands” and weed out those brands that don’t contribute much to the bottom line. 

Should You Sell Coca Cola Stock?

All this is great – and Coke could recover – but the question isn’t whether KO is a well-managed company or if it is a titan of industry that will continue to own some of the most popular brands in the world.

The company is one of the major players in its industry and that fact isn’t likely to change. The real question is whether the stock is a good fit for your portfolio and that is something entirely different.

COVID aside, Coke is facing challenges to its future. Obesity is one of its biggest risk factors.

People are increasingly concerned about sugar consumption, be it from soda or juice, and some governments are getting involved.

An increase in taxes on sugar-sweetened beverages could have a severe impact on the demand for Coke’s product family.

Consumer preferences may change too. The health and wellness industry is prompting people to have nutrition concerns beyond obesity, concerns in the origins of ingredients, and shift their lifestyles.

For some people, this means cutting out soda, reducing coffee intake, and staying away from juice.

This consumer shift means that Coke will have to face competitors that weren’t even on the same playing field a few years ago.

At the same time, Coke identifies water quality, decreased agricultural productivity, and product safety as being central concerns as well. 

Is Coca Cola A Good Dividend Stock?

Altogether, only time will tell whether Coke is a valuable position for most investors or whether opening a position in a different company would be more advantageous.

The company does have many attributes to recommend it. Investors should do their research and see how Coke could fit into their portfolio strategy and investment goals. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.