Finally, we can’t forget that with 80% of operating profits coming from overseas and emerging markets, the largest growth runway for the company, currency risk might represent a major headwind for Coke’s growth plans going forward.
Specifically the risk of a rising dollar, which is already at historically strong levels, could mean that when Coke converts local currencies into the dollars that pay the dividend, a rising exchange rate will mean that bottom line growth may prove slower than investors hope.
That risk will only increase if U.S. interest rates rise, both because of the Federal Reserve normalizing its short-term rate, and because long-term yields on U.S. Treasury bonds are likely to rise if the Trump administration is successful in passing a major stimulus bill (of infrastructure spending and tax cuts), which could boost economic growth but also inflation.
Since 10- and 30-year Treasury yields are based mostly on long-term inflation expectations, these could rise significantly and in fact are already up about 0.6% since Trump won on November 8th.
Thanks to interest rates around the globe remaining at zero, or even negative rates, foreign investor demand for higher-yielding U.S. treasury bonds is likely to increase demand for the dollar even further, resulting in potentially stronger negative currency effects in the coming years.
Dividend Safety Analysis: The Coca-Cola Co (NYSE:KO)
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors (2) such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
Coca-Cola has a Dividend Safety Score of 99, indicating its dividend payment is extremely safe.
This is a result of the company’s strong cash flows which provide for manageable payout ratios that have remained near 70% in recent years. While that may seem high, you have to keep in mind that Coke’s strong brands make for a wide moat, meaning little risk that rivals like PepsiCo, Inc. (NYSE:PEP) and Dr Pepper Snapple Group Inc. (NYSE:DPS) will be able to steal its market share.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
Coca-Cola’s strong Dividend Safety Score is further supported by the company’s excellent free cash flow generation and recession-resistant business. As seen below, Coke has generated positive free cash flow each year for more than a decade and managed to grow its free cash flow per share each year during the last recession (sales only fell 3%).
Source: Simply Safe Dividends
