The “Dividend King” Stock to Own Amid Rising Interest Rates

Billy Toh

March 23, 2022

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The US Federal Reserve (Fed) has delivered its first interest rate hike after more than three years and raised its benchmark rate by 0.25% to bring it into the range of 0.25-0.50%.

The decision, taken at the Federal Open Market Committee (FOMC) meeting, was made to combat the worst rate of inflation in the US since the 1970s.

Fed policymakers are expecting inflation to remain elevated and to end the year at 4.3%, which is far above the 2% annual target.

The central bank’s officials have also revised its economic growth forecast downwards to 2.8% this year, from its 4% estimate in December 2021.

During the meeting, Fed officials said they are now expecting another six more rate hikes to raise its short-term rate to 1.875% by the end of this year.

Amid rising interest rates, I think investors should consider The Coca-Cola Company (NYSE: KO), one of the most iconic brands and stocks in the US market.

In fact, I think Coca-Cola is the “Dividend King” that investors should turn to amid the rising interest rate environment.

A Dividend King is a publicly-listed entity that has increased its shareholder dividends every year for the last 50 years.

These companies have a proven track record of rewarding shareholders with regular dividends.

With that, here are three key reasons why I think Coca-Cola deserves some love from investors.

1. Strong dividend track record

Incredibly, Coca-Cola has paid a dividend for over 60 consecutive years. The question of its dividend safety is moot given its track record (see below).

Source: SeekingAlpha, ProsperUs

It is also worth noting that the company has continued to increase its dividend despite the decline in revenue.

So, how is it that Coca-Cola manages to keep raising its dividend every year? The answer is the free cash flow (FCF) of the company has been on the rise.

In fact, Coca-Cola’s FCF has jumped from US$8 billion in 2012 to US$11 billion in 2021 despite the decline in its revenue.

2. Coca-Cola has delivered on its transition

While there are concerns over whether Coca-Cola’s declining revenue is a red flag to watch out for, I think that investors need to look beyond the headlines.

When we talk about Coca-Cola, we’re talking about the company’s brand and marketing strength.

And over the last decade, the management has shifted away from some capital intensive and low-margin businesses, such as the bottling operations.

The bottling business has helped the company to generate more revenue per drink sold but margins were impacted due to the associated costs.

Coca-Cola’s free cash flow has surpassed its 2014 level and has maintained its resilience despite the impact of COVID-19 over the last two years.

Source: SeekingAlpha, ProsperUs

Below is a summary of Coca-Cola’s strategy to drive the company forward in the post-COVID world.

Based on the latest financial data, the company has emerged stronger as compared toits pre-pandemic level and with the reopening of the economy and travel, I expect to see sales pick up.

Source: The Coca-Cola Company Website, ProsperUs

3. Pricing power of its brand

Another reason why I think Coca-Cola deserves a spot in long-term investors’ portfolios is the pricing power of its products.

If you look at the company’s gross profit margin, it stood at 60.3%, higher than the 53% of its closest competitor, PepsiCo Inc (NASDAQ: PEP).

While there were concerns over the inflationary environment, the ability to pass on the cost to consumers is seen in its huge profit margin.

On top of that, the global reopening in the post-COVID world will give the company extra room to grow.

With over 200 brands worldwide, this gives the company an edge to recover as the world reopens.

Coca-Cola is the value dividend stock to buy

While the Russia-Ukraine war has put a halt to the rotation into value stocks, I think if investors are looking for both value and dividend stocks, Coca-Cola is one of the first on the list to look into.

I believe that Coca-Cola offers a defensive proposition to a portfolio. While I think the current price reflects its value, long-term investors will find it to be rewarding to own a dividend growth company that has a rich history.

Over the last decade, Coca-Cola has managed to deliver a total return of 132.97% or a compounded annual growth rate (CAGR) of 8.8% over the last 10 years. This came despite the transition that the company was going through.

I think the best way to invest in The Coca-Cola Company is to take a sip of Coca-Cola and enjoy the dividend. Like its tagline, “Taste the Feeling”…of dividend returns!

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.