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Today, The Coca-Cola Company (KO) reported that its revenues, operating margins, and free cash flow rose in 2023 and Q4. Moreover, Coke will likely to hike its upcoming dividend, giving KO stock a 3.25% yield. That makes it attractive to value investors.
Coca-Cola said revenues were up 7% for the quarter and 2% for all of 2023. In addition, its operating margin was 21.0% versus 20.5% in the prior year. More importantly, its free cash flow (FCF) rose to $9.75 billion in 2023, which was 2% higher than the $9.54 billion it made in 2022.
Its FCF margin fell from 22.2% in 2022 to 21.3%, but this might be accounted for by an increase in capex spending. For example, capital expenditures were $1.484 billion, but in 2023 it rose by almost 25% to $1.85 billion. The bottom line is that FCF was still strong despite this massive capex spending hike.
Dividend Is Likely to Rise
Although the company did not announce a dividend hike last year it declared a higher quarterly dividend on Feb. 16, and Feb. 17 in the prior year to that. So, investors expect to see the company hike its dividend this week as well.
Moreover, Coca-Cola said in its capital allocation section of the press release that it has increased its dividend in each of the last 61 years. For example, in 2023 its declared dividend per share (DPS) was $1.84 vs. $1.76 in 2022, an increase of 4.55%. That worked out to 2 cents higher per quarter.
So, if it were to increase the quarterly dividend to 48 cents from 46 cents for 2024, that would involve a 4.34% DPS hike. This gives KO stock an attractive 3.25% dividend yield at $59.08 per share today.
Share Buybacks Help Investors
Interestingly, the cost of the dividend rose from $7.616 billion in 2022 to $7.952 billion in 2023, a gain of just 4.4%. In other words, even though the DPS rose by 4.55% the cost rose only 4.4%.
The reason is that the number of shares outstanding declined. This was the result of the company's share buyback program which totaled $1.7 billion in 2023 on a net basis.
As a result, the company can increase its DPS slightly higher than the additional cost of the dividends to the company. Over time this can produce good additional income for investors.
Outlook and Valuation Look Good
Coca-Cola said it expects to see organic revenue (non-GAAP) growth of 6% to 7% in 2024. It also expects comparable earnings per share (EPS) (non-GAAP) growth of 4% to 5%, versus $2.69 in 2023.
Analysts now project EPS of $2.81 in 2024, a potential rise of 4.46%. Moreover, this puts KO stock on a reasonable forward multiple of just 21x (i.e., $59.08/$2.81).
In addition, if its FCF margins stay level at 21.3%, FCF could hit $10 billion, given analysts' estimate of $47 billion in revenue. That implies its market cap could reach $266.7 billion using a 3.75% FCF yield metric. That is about 4.6% over today's $255 billion market cap.
This also puts KO stock on a price target of $62.55 per share (i.e., 4.6% over today's price).
The bottom line is that this makes KO stock an attractive long-term holding for value investors, especially given its stable FCF and dividend yield.
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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.