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Is Coca-Cola (KO) Warren Buffett’s Best Dividend Stock Pick?

Warren Buffett has been holding stakes in Coca-Cola Company (NYSE:KO) since the fourth quarter of 2010. As of the end of Q1'2024, the beverage company accounts for over 7% of the Oracle of Omaha's $332 billion portfolio. Buffett praises Coca Cola for its regular dividends and excellent business in almost every annual shareholder letter.

Coca-Cola Company (NYSE:KO) has announced annual dividend increases over the past 62 years without a break, an achievement which has made it one of the safest dividend stocks in the market. Coca Cola's business continues to remain strong despite decades of growth, one of the reasons why Buffett hasn't touched his investment in all these years.

For example, in his 2023 letter to Berkshire investors, Buffett shared his thoughts about Coca-Cola Company (NYSE:KO) which show the trust and confidence he has in Coca Cola's business and management:

"During 2023, we did not buy or sell a share of either AMEX or Coke – extending our own Rip Van Winkle slumber that has now lasted well over two decades. Both companies again rewarded our inaction last year by increasing their earnings and dividends. Indeed, our share of AMEX earnings in 2023 considerably exceeded the $1.3 billion cost of our long-ago purchase. Both AMEX and Coke will almost certainly increase their dividends in 2024 – about 16% in the case of AMEX – and we will most certainly leave our holdings untouched throughout the year. Could I create a better worldwide business than these two enjoy? As Bertie will tell you: “No way.”

Best Warren Buffett Dividend Stocks
Best Warren Buffett Dividend Stocks

Dividend Safety

With over six decades of consistent dividend increases and rising cash flows, dividend safety is not the biggest concern for Coca-Cola Company (NYSE:KO) investors. Despite a tough economic backdrop last year, Coca Cola's FCF inched up 2% to about $9.7 billion, more than $8.4 billion it needs to completely cover its dividend.

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At over 73%, The Coca-Cola Company (NYSE:KO)'s payout ratio is high, which has made some investors uneasy. However, The Coca-Cola Company (NYSE:KO) expects its earnings to grow and plans to buy back stock, which is going to further boost its dividend safety metrics. Coca Cola expects adjusted EPS to grow 4% to 5% in 2024. The company's CFO John Murphy talked about Coca Cola's plans to support its dividends during Q1'2024 earnings call:

"We’re committed to investing to drive growth and to support our dividend, which we have raised for 62 consecutive years. We’re confident our business model has the flexibility to allow us to deliver on our overall objectives. Our updated 2024 guidance reflects the underlying momentum of our business, and we now expect organic revenue growth of 8% to 9% and comparable currency neutral earnings per share growth of 11% to 13%. Our revised top-line guidance is solely driven by higher than expected inflationary pricing in a handful of markets, which we expect to moderate throughout the year."

The Coca-Cola Company (NYSE:KO) also announced a $3.1 billion share repurchase plan.

Growth Catalysts and The Coca-Cola Company (NYSE:KO)'s Bullish Thesis

The Coca-Cola Company (NYSE:KO) is among the top ten most valuable brands in the world, with a massive 9% increase in brand value in 2023. Coca Cola was the only company with such a dramatic growth in brand value last year, according to data from BrandZ. Despite being a mature company and a market leader in the beverage space, The Coca-Cola Company (NYSE:KO) enjoys strong growth catalysts. Over the next ten years, analysts expect Coca Cola's EPS to grow at a CAGR of about 6%, totaling $5.03 in 2033. Analysts believe Coca Cola's efforts (example: Studio X, music studio projects in various countries, youth-focused marketing) to woo younger customers from the Generation Z demographic are bearing fruit. Last year, despite the inflation storm and weakening consumer sentiment, The Coca-Cola Company (NYSE:KO)'s earnings grew 8%, while organic revenue saw a 12% growth, driven by emerging markets like India, Latin America, Japan, and South Korea.

Not Just Coke

The Coca-Cola Company (NYSE:KO) isn't selling just Coke. It's been quietly diversifying its business over the past several years. The Coca-Cola Company (NYSE:KO) is behind Costa Coffee products (the company it bought in 2019), sports performance drinks BodyArmor and milk beverages company Fairlife. The Coca-Cola Company (NYSE:KO) is also expanding its alcoholic drinks business, albeit at a slower pace. In 2018, it started selling its first-ever alcoholic drink. In 2022, The Coca-Cola Company (NYSE:KO) partnered with Jack Daniel's to sell Jack and Coke premixed cocktails.

Valuation

The Coca-Cola Company (NYSE:KO)'s P/E ratio is 25.32, much lower than the sector (soft beverages) median P/E (trailing) of 33.67 and forward P/E ratio of 28.21, according to data from NYU Stern School of Business. According to data from Yahoo Finance, Wall Street analysts on average have set a $67.43 price target on Coca Cola. The stock was trading at around $63 as of May 20. This shows The Coca-Cola Company (NYSE:KO) shares have an upside potential of about 7%.

Is Coca Cola The Best Warren Buffett's Dividend Stock Pick?

Despite this positive sentiment and catalysts, Coca-Cola Company (KO) is not in the list of Warren Buffett's 8 Best Dividend Stock Picks.

Click to see the complete list of 8 Best Dividend Stock Picks of Warren Buffett.   Disclosure: None Is The Coca-Cola Company (NYSE:KO) Warren Buffett's Best Dividend Stock Pick? was originally published on Insidermonkey.com