The Coca-Cola Company (KO) will likely hike its annual dividend to at least $1.92 per share. That puts KO stock on a 3.23% yield and highlights its powerful free cash flow (FCF). Based on this FCF and its stable FCF margins, KO stock looks to be worth at least $67 per share, an upside of 13%.
In the past 4 quarters, Coca-Cola has paid out 46 cents per share per quarter in dividends, or $1.84 annually. That was up 2 cents per quarter from the prior year when it paid out 44 cents, or +4.55%.
Since Coke has consistently raised its dividend every January for the past 61 years, investors can expect another rise. So, if it raises the dividend by another 2 cents or +4.35%, the new annual dividend will be $1.92 per share.
At today's price of $59.50 per share, that gives KO stock a prospective dividend yield of 3.23%. This implies that KO stock could move higher for several reasons.
Coca-Cola Price Target Using Dividend Yield
For example, Morningstar reports that the average dividend yield for KO stock in the past 5 years has been 3.05%. This implies KO stock should rise if it were to achieve that yield with this new dividend.
Here is how that works. If we divide the new prospective dividend of $1.92 per share by 3.03% we get the following: $1.92 / 0.0303 = $63.36.
That implies that KO stock should be trading at $63.36 per share just to achieve this average dividend yield. This is because $1.92/$63.36 equals a yield of 3.03%.
FCF More Than Covers the Dividend
But let's also look at the fundamentals of why the stock could move higher. That is because the dividend is paid out of the company's free cash flow.
If we can project that the FCF will be higher in 2024, Coca-Cola will be able to afford to raise its dividend.
For example, Cola-Cola generated over $7.9 billion in FCF year-to-date (YTD) and $10.17 billion in the last 12 months (LTM). That can be seen by looking at Seeking Alpha's trailing year cash flow statements. It shows $11.879 in cash flow from operations less $1.709 billion in capex spending, or a net $10.17 in FCF.
Moreover, this FCF funded $7.784 billion in dividend payments. In other words, the FCF more than covered the dividends that Coca-Cola paid out. If this keeps up it could easily afford to raise the dividend.
Valuing KO Stock Using FCF Yield
In addition, we can use this to estimate the value of KO stock. For example, given that its LTM revenue was $45.03 billion its $10.17 billion in FCF worked out to an FCF margin of 22.6%. We can use that FCF margin to estimate its 2024 FCF.
For example, analysts now expect $46.88 billion in revenue this year. This implies that FCF could rise to $10.59 billion (i.e., 22.6% x $46.88b). This will help us value KO stock.
One way to do this is to use its dividend yield as a measure. For example, if we divide $10.59 billion in FCF by 3.23% we get a market value of $327.9 billion. That is 27.5% over its market cap today of $257.16 billion.
But just to be conservative let's use a higher FCF yield metric of 3.33%. That is also the same as multiplying FCF by 30x (since the inverse of 0.03333 is 30). In other words, $10.17b x 30 produces a market cap target of $305 billion.
That is 18.6% over today's market cap of $257.15 billion. It implies that KO stock could be worth $70.59 per share (i.e., 1.186 x $59.50).
Summary
The bottom line is that the average price target using dividend yield is $63.36 per share and using FCF yield it is $70.59. The average of these two is $66.98, which is about 13% over today's price.
So investors in KO stock now have a dividend yield hike to look forward to. They can also believe that KO stock could be worth at least 13% more over the coming year.
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.
