Some people get into investing with the notion of reaching a point where their portfolio generates enough passive income that it covers their monthly budget expenses, allowing them to stop working and enjoy full retirement. Part of doing that requires finding stocks that generate dividend growth from year to year that account for inflation.

Having upped its dividend payout for 61 consecutive years, the Dividend King Coca-Cola (KO) has been an example of just such a stock. But looking toward the coming decades, is this consumer staple still a buy for investors seeking consistently growing income? Let’s plunge into Coca-Cola’s fundamentals and valuation to see if an answer presents itself.

Coca-Cola’s portfolio of iconic brands is fueling growth
Most everybody enjoys a refreshing beverage. But with a wide variety of taste preferences, not everyone finds the same beverage enjoyable (or refreshing). Coca-Cola is aware of this. The company has more than 200 brands in its portfolio of products (and hundreds of variations within those brands) that are sold in just about every country and territory on the planet.

The odds are good that at least one of these brands can please just about any taste bud. These legendary brands range from carbonated soft drinks to juice, dairy, and plant-based beverages to water and sports drinks. Some of the more well known include Coca-Cola, Smartwater, Simply, Powerade, Costa Coffee, Dasani, Fairlife, Gold Peak, and Schweppes.

Coca-Cola’s net revenue for the second quarter ended June 30 grew at a 5.7% year-over-year clip to $12 billion. A more favorable sales mix with strong away-from-home channels growth and price hikes passed onto consumers contributed to a 10% growth rate in price/mix during the quarter. Increased sales volume of syrup to authorized bottlers chipped in another percentage point to the company’s top-line growth in the quarter.

Coca-Cola’s global sales presence at a time when the U.S. dollar is strong weighed on its net revenue by four percentage points thanks to unfavorable foreign currency translation for the second quarter. And the refranchising of bottling operations in Cambodia and Vietnam in recent months had an unfavorable impact of one percentage point on the company’s top line during the quarter. Together, these factors explain Coca-Cola’s mid-single-digit net revenue growth in the quarter.

The Atlanta-based consumer staple generated $0.78 in non-GAAP (adjusted) diluted earnings per share (EPS) for the second quarter, which was 11.4% greater than the year-ago period. Aside from its higher net revenue base, Coca-Cola’s moderated growth in total expenses helped its non-GAAP net margin to meaningfully expand during the quarter. Along with a slight reduction in its outstanding share count from share buybacks, this is how the company’s adjusted diluted EPS growth surpassed net revenue growth in the quarter.

Looking to the future, Coca-Cola’s willingness to explore new product ideas should enable the company to capture a larger market share in the growing $1.3 trillion ready-to-drink beverage market. This is why analysts believe Coca-Cola’s adjusted diluted EPS will rise by 6.2% annually for the next five years.

The dividend could have decades of growth left
Compared to the S&P 500 index’s average 1.5% dividend yield, Coca-Cola’s 3% yield is high enough that it could quench the thirst for income for most yield-oriented investors. The cherry on top is that the company’s dividend should have no difficulty climbing by 5% to 6% annually in the years ahead.

This is because Coca-Cola’s dividend payout ratio is around 56%, not far off its long-term average of 58%. That should leave the company with enough capital to launch products to seize market share, repurchase shares, improve the balance sheet, and continue to grow its dividend each year.

A reasonable valuation for a wonderful business
Trading down 2.5% year to date, share prices of Coca-Cola have been about as flat so far in 2023 as a Coke can that’s been open for a few days. This has led to Coca-Cola’s forward price-to-earnings (P/E) ratio falling to 22.2, which is slightly less than the non-alcoholic beverages industry average forward P/E ratio of 22.4. With its profits slated to grow, this makes the stock a potential long-term buy for income investors looking to keep up with inflation in their retirement.

— Kody Kester

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Source: The Motley Fool