The single reason Coca-Cola stock is still a buy - the dividend

It’s becoming a familiar phrase in 2020. But honestly, most analysts knew that, for most companies, second-quarter earnings would be brutal. And on a year-over-year basis that was true for Coca-Cola (NYSE: KO).

Earnings for the beverage company were down 33% on a year-over-year (YoY) basis. However, the 42 cents earnings per share (EPS) beat analysts’ expectations by two cents per share. Revenue of $7.2 billion was down 28% YoY and also missed analysts’ expectations by six billion dollars.

Coke shares are up just over one percent on the news in late-day trading. So the question is why? And for that answer, you have to remember this is 2020.

Look beyond the Coca-Cola earnings report

We’re getting into the dog days of summer. And that means the market historically starts seeing red. But 2020 hasn’t been a normal year. Stocks are showing an amazing resilience based on what many investors have to hope is not misplaced optimism.

Investors want to be reassured that the worst is over. I’m not sure if any company knows that for sure, but Coca-Cola seems to think so. In the quarter, the company reported a decline of 16% in unit case volume. But as bad as that number is, it’s an improvement from the 25% decline the company reported in April.

Not unexpectedly, Coke saw an increase in sales from residential consumers who stocked up on the company’s beverages throughout the pandemic. But by itself that is not sufficient. Coca-Cola needs to have the volume that comes from restaurants and bars. But it also won’t be all the way back until fans are allowed to attend sporting events and movie theaters are open.  All of these businesses, and more, make up the “away-from-home” category.

To say the least, that is a category that has a cloudy outlook. With that in mind, company executives did not reissue full-year guidance citing continued uncertainty on the effects of the Covid-19 pandemic. However, the company said the second quarter looks like it will be its most challenging of the year.

This was a similar sentiment expressed by Coke’s rival Pepsico last week. But there’s a difference between the two companies.

Coke is not Pepsi

Pepsico (NASDAQ: PEP) delighted investors last week by beating analysts’ expectations on both the top and bottom lines. But Pepsi has a line of snack foods that sets it apart from Coke which is more of a pure-play beverage business.

And that’s something that some investors will say makes Pepsi a better long-term investment than Coke. And when you look at the trajectory of the two stocks over the last five years, it’s clear that Pepsi has given investors significantly much more growth.

But Coke is not a growth stock and hasn’t been for years. It continues to venture outside of its traditional carbonated beverage products. But for Coke, there is no catalyst for meaningful growth at this time.

The single reason Coke stock is still a buy - the dividend 

There are some things that investors can count on as surely as the sun rising in the east. And Coca-Cola delivering a dividend is one of them.

The company is in the elite group of Dividend Kings that has increased its dividend every year for at least 50 consecutive years. In the case of Coke, it’s now 57 years. The company barely made it this year, increasing the dividend by a mere penny, but they did it. And in a year when many companies are slashing or suspending dividends, that’s not a feat that should be overlooked.

There is some concern over when Coke’s string may come to an end. The company’s payout ratio is over 66% based on cash flow. That’s making some analysts uncomfortable. And Coke has a lower-ranked payout ratio than 63% of the 56 companies in the Beverages/Non-Alcoholic industry.

However, I think intellectual honesty demands that if Covid-19 is allowed to affect the company’s revenue and earnings, it also has to be taken into account when looking at the dividend. Over the past three years, Coke has managed to increase its dividend over 14% on an annual basis. 

With baseball season starting (finally) I leave you with this. All good things come to an end. At one time, New York Yankees “iron man” Lou Gehrig ended 2,130 consecutive games played streak when he found the one opponent he couldn’t beat.

At some point, Coke’s dividend streak will come to an end. But at the same time, if you’re a value investor, you could very well look back over several years and consider yourself very lucky to have ignored the noise and buying shares of this dividend giant yesterday, today, and tomorrow.