Can KO Give You a 2,400% Return Over 25 Years?

KO - Coca-ColaWhen most people think of dividend stocks they imagine stodgy slow growing companies that are past their peaks.  Dividend stocks have a reputation as being ‘conservative’, and suitable for those with low-risk tolerances.  This is, even more, the view for Dividend Aristocrats; stocks with 25 or more years of consecutive dividend increases.

Coca-Cola, Warren Buffett, & Growth Potential

25 years ago in 1989, Coca-Cola NYSE:KO already had 27 years of consecutive dividend increases.  The company was not viewed as a rapidly growing new business.  Warren Buffett saw that Coca-Cola had a long-growth runway ahead of it.  Coca-Cola stock has returned over 2,400% (including dividends) since 1989.  For comparison, the S&P500 (as measured by the investible VFINX fund) returned less than 1,200% over the same time period which is still great, but less than half of what Coca-Cola returned.  Clearly, Warren Buffett was right about Coca-Cola.

What is important to note is that Dividend Aristocrats can offer phenomenal returns despite being well-known and well-established businesses.  I want to say right now, that every Dividend Aristocrat stock will not outperform the market, and most will likely not do as well as Coca-Cola has done over the last 25 years.  With that said, the potential for phenomenal returns is still there with high quality dividend growth stocks.

Coca-Cola in 1989

Are there really Dividend Aristocrats around today that are similar to Coca-Cola in 1989?  Take a look at the company’s fundamentals in 1989:

  • Consecutive Years of Dividend Increases:  27
  • P/E Ratio:  15.26
  • Payout Ratio:  42.11%
  • Dividend Yield:  2.76%
  • 10 Year Dividend/Share Growth Rate:  9.38%
  • 10 Year Revenue/Share Growth Rate:  7.05%
  • 10 Year Price Volatility:  30.13%

Coca-Cola was not a classic value stock; it’s P/E ratio was a reasonable 15.26.  The company was growing, but was not exhibiting phenomenal growth; it’s 10-year revenue per share growth rate was under 10%.  What made Coca-Cola special in 1989 was its growth potential and its consistency.  The company had a long growth runway ahead, and the ability to capture that growth.

Coca-Cola vs. Today’s Top Dividend Stocks

Coca-Cola in 1989 ranks highly based on fundamental data compared to today’s high-quality dividend stocks but does not stand head and shoulders above the rest.  The Rules of Dividend Investing rank businesses based on several quantitative metrics that have historically improved returns.  Some metrics used are dividend yield, payout ratio, and long-term growth rate.  Using the 8 Rules of Dividend Investing, Coca-Cola of 1989 would be the 21st highest ranked stock today.  Surprisingly, Coca-Cola today outranks Coca-Cola in 1989.

Coca-Cola Still Has Phenomenal Growth Potential

Not too much has changed at Coca-Cola over the last quarter century.  The company still sells more soda than any other business in the world.  Coca-Cola is now also the number one non-carbonated beverage company in the world.  Over the last decade, Coca-Cola has grown both revenue per share and dividends per share by about 9% a year.  The company will likely continue its strong growth by growing sales in the developing world.

The beverage industry is expected to add about $300 billion in value by 2020.  Coca-Cola currently controls 30% of the industry.  If the company does not gain market share (and I think it will), it can grow at nearly 7% a year without dividends.  Including dividends and share, repurchases push the company’s expected compound annual growth rate above 10% a year.  If you add in gains in market share and operating margin gains from better efficiency, the company could very likely compound investor growth at 11% to 12% a year with very little risk.

The low-risk aspect of Coca-Cola is key.  The company sells non-alcoholic beverages.  The beverage industry is very slow changing.  It is rare for technological changes to greatly alter the beverage industry.  Further, consumer tastes change slowly giving Coca-Cola time to adjust its operations to match consumer preferences.  An excellent example of this is Coca-Cola’s strong non-carbonated brand portfolio.

Coca-Cola has 19 brands that have sales of over $1 billion or more a year.  Of these 19 brands, 11 are non-carbonated.  Coca-Cola’s non-carbonated portfolio includes Powerade, Aquafina, Simply juice, Minute Maid, and several international brands.  The company has expertly positioned itself to take advantage of the slow shift in consumer preference away from sodas and toward non-carbonated drinks.  In fact, Coca-Cola has gained 33% of total growth in the juice market since 2007.

There Is More than Just Coca-Cola

Investors looking for high-quality businesses that still have strong growth potential should take a close look at Coca-Cola.  There are other Dividend Aristocrats that have excellent long-term growth prospects besides Coca-Cola.  Overall, Dividend Aristocrat stocks have outperformed the S&P 500 by 2.29 percentage points a year over the last decade.

Dividend Earner has several high-quality Dividend Aristocrat stocks on this Top 10 stocks page, including McDonald’s, Wal-Mart, Chubb Corporation, and ExxonMobil.  Dividend stocks in general, and Dividend Aristocrats, in particular, have an unfair image of being low growth.  Coca-Cola in 1989 is an example of a Dividend Aristocrat that managed to compound shareholder wealth greatly over the next 25 years.  There are currently several Dividend Aristocrat stocks that have managed to grow revenue per share in the high single digits and have long-growth runways ahead.  When thinking of Dividend Aristocrats, lower risk does not necessarily mean lower growth.

About the Author:  Ben Reynolds is the founder of Sure Dividend.  Sure Dividend focuses on high-quality dividend growth stocks suitable for long-term holding periods.  Ben Reynolds’ articles have appeared on various investing sites including Seeking Alpha, Motley Fool, The Street, Fidelity, Guru Focus, Old School Value, and Value Walk.

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