For some dividend-paying companies, their profits are actually lower than their dividends. This is usually an excellent indication that the dividend will be cut. At Coca-Cola (KO, Financial), this isn’t even a remote concern. Coca-Cola has a safe and growing dividend. This is because of the company’s excellent financial condition and the company’s sustainability. Coca-Cola regularly invests in advertising, reducing expenses, repurchasing its shares and buying its competitors. It also has the largest beverage-distributing system in the world which gives it opportunities to partner with some competitors, such as the recent deal with Monster (MNST, Financial).
Coca-Cola has excellent financials that indicate their current dividend level is sustainable. For the first 9 months of 2014, Coca-Cola had net income attributable to shareowners of the Coca-Cola Company of $6,328 million. As an additional check, Coca-Cola’s free cash flow (Net cash provided by operating activities minus purchases of property, plant and equipment) was $7,979 million minus $1,168 million equaling $6,811 million. Both figures dramatically trump the dividends paid during the first nine months of 2014 of $2,680 million. In addition, the Coca-Cola’s company’s current assets still exceed current liabilities at the end of Q3 2014. The Coca-Cola has long-term debt of $20,111 million. By dividing the net income by nine months to determine the company’s profit per month, it can be determined approximately how long it would take for Coca-Cola to pay off its long-term debt with profit. Coca-Cola’s approximate profit per month = $6,328 million/9 months = $703 million/month. This means that Coca-Cola could pay off its long-term debt in approximately $20,111 million/$703 million/month equaling 29 months (about 2.5 years). Since Coca-Cola is earning dramatically more than its dividend and doesn’t have excessive debt, Coca-Cola definitely has the ability to continue distributing the current level of dividends.
Coca-Cola owns or licenses and markets more than 500 nonalcoholic beverage brands. It has 17 billion dollar brands and globally is the number one provider of sparkling beverages, ready-to-drink coffees, and juices and juice drinks. This gives Coca-Cola long-term sustainability. Some of the profits that Coca-Cola doesn’t distribute to shareholders is reinvested in efficiency initiatives and advertising. For the first nine months of 2014, Coca-Cola spent $2,684 million on advertising. The efficiency initiatives reduce the expenses of the company. Some of the other profits are invested in repurchasing their own shares and buying other businesses that are usually complimentary to their own. These will allow the Coca-Cola Company to increase their profits in the future which will give them the flexibility to increase their dividend.
One of the other very distinct advantages that Coca-Cola has is the largest beverage distributing system in the world which gives it opportunities to partner with other companies. Recently Coca-Cola partnered with Monster for mutual benefit. Coca-Cola will be the preferred distribution partner for Monster and bought out approximately 1/6 of the company. This will prevent competitors from distributing Monster and allow Coca-Cola to profit when Monster profits. In addition, Coca-Cola gave Monster its energy drink brands and Monster gave Coca-Cola its non-energy drink brands. This will allow Monster to focus on growing the energy drink business which has been their specialty and Coca-Cola to focus on managing the non-energy drink brands, which is their specialty.
The Coca-Cola Company has an excellent financial position that will allow the company to easily continue distributing the current level of dividends. The profits that aren’t used to pay the dividends increase the sustainability of the company by advertising, reducing expenses, repurchasing their shares, and buying other companies. The company partners with other companies to expand their (already largest) beverage distributing system. These are the reasons that Coca-Cola has dividends that are safe, sustainable, and growing.
