If you're a shareholder of Coca-Cola (NYSE: KO), you got some great news on Thursday. The arch rival of PepsiCo (NYSE: PEP) increased its dividend by 8%. The quarterly payout changes from $0.38 per share to $0.41 per share. Simply marvelous (and, yes, I am a shareholder).
Coca-Cola can easily afford to increase its dividend. It's got the cash flow to back it up. For the full fiscal year, Coke increased its operational cash flow by 6%, coming in at $7.6 billion. Capital expenditures, plus acquisitions and investments, totaled roughly $2.8 billion. The amount of dividends paid to shareholders in 2008 was about $3.5 billion. As can be seen, Coke has enough of the green stuff to up its dividend by a high single-digit percentage. Heck, I was hoping for a 10% increase. Management could have done it, it would have amounted to an extra penny, but I'm okay with this.
This makes the stock very attractive as a long-term play. And we may need good, solid, long-term dividend plays more than ever before. In case you've been living under a rock, the financial system is getting worse. Sure, government is out there doing what it can, but who knows what's going to happen. The Dow sank on Thursday to a frightening level. Yet, good ole Coke was actually up a little on the day.
I don't think the dividend increase had much to do with that. Well, maybe it did have something to do with it, but I don't think the dividend yield is going to save Coke's stock from heading lower. The 52-week low is $40.28. Coke closed on Thursday at $43.30. At that price, and at the new dividend of $0.41 per share per quarter, the stock yields almost 3.8%.
However, with things getting so bad, and with credit still a problem, I have to imagine that Coke will have problems growing its business. No matter how defensive it is, this beverage company will have a challenging year. It's just the way things are. If you pull up a 5-year chart at AOL Finance for the stock, you'll see that Coke shares hit a multi-year low of $39.21 back in November 2004. Obviously, it doesn't take much logic to suggest that, given current conditions, which are hideously atypical and very difficult to predict, Coke could easily go below $40 per share before it eventually (or, maybe that should be hopefully) rises again.
Nevertheless, I'm doing pretty good with my long-term Coke position. My costs basis actually isn't too far from the current price -- around $49 per share. Dividend reinvestment has really helped me over the years, because I first started my Coke position back in 1998, when the stock was well above $80 per share!
With this latest dividend increase, I know that Coke's cash-generating abilities are still healthy. And I know that I can hold with confidence. Traders, however, should not care about the dividend increase as it means nothing in the short term. The market could take out Coke's recent lows just as easily as the Cloverfield monster took the head off the Statue of Liberty. For now, though, I'll sit back and feel good about my position, and maybe try to add to it if it does actually break the multi-year low.
Disclosure: I own Coke; positions can change without notice.
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