On January 25th, I published the dividend increase predictions expected in the DGI For The DIY Portfolio during the first quarter of 2017. After seeing dividend growth announcements from Polaris Industries, and then from Church & Dwight and Gilead Sciences, my sights moved towards the two soft drink companies in my portfolio, The Coca-Cola Company $KO and Dr Pepper Snapple Group, Inc. $DPS.
Before we get to the latest announcements, here is a look at what my predictions were for the portfolio increases:
For Dr Pepper, I predicted that it would announce an 11.32% dividend increase on February 9th. This was based on an expected 50% payout ratio on estimated 2017 EPS of $4.73.
As expected, Dr Pepper announced its new dividend on February 9th; however the new rate came in at $0.58 per share, a penny short of my expectations.
While this is a bit short of my prediction, it isn’t really much of a surprise, as the company made a big acquisition in late 2016 with the $1.7B purchase of the enhanced water beverage company, Bai Brands LLC. This addition to Dr Pepper’s product portfolio provides it with a solid avenue for new growth in the healthier drink category, and in my view, is a home run for the company.
I’m excited about the potential upside that this presents, and am encouraged that management is expanding its sights to new growth horizons. To get a 9.4% dividend increase at the same time is a nice cherry on top!
Moving on to Coke, I was expecting to see an announcement on February 16th, and a $0.015 (4.3%) increase in the dividend rate.
The company did announce on February 16th, and gave me a nice surprise as it announced a full two-cent increase in the dividend, to $0.37 per share.
This 5.7% increase was above what I expected, as it looks to be another year of negligible earnings growth for the company. With earnings of just $1.87 expected for 2017, this new dividend rate now creates a payout ratio of nearly 80%. This level is unprecedented in recent years, as the payout is historically in the ~50% range for Coke, as seen from the F.A.S.T. Graphs snapshot below.
The fact that management continues to reward shareholders with 5%+ dividend growth despite stalling earnings is encouraging, and highlights why Coke is considered one of the greatest dividend growth companies of all-time. However, as the payout ratio continues to march to higher levels, it is beginning to become a bit worrisome that it can be sustained long-term.
Coca-Cola has a nearly $178B market cap, and has expanded to pretty much all ends of the earth. This makes it susceptible to a strong dollar (which negatively impacts earnings), and also makes it difficult to find new avenues for growth, as there aren’t many bolt-on acquisitions that can move the needle for revenues for such a large company.
That said, Coca-Cola is a company with a 125-year track record of being an excellent steward for shareholders, and I remain confident that it will figure things out and continue to be a good long-term investment for my portfolio. In the meantime, I will continue to reinvest dividends at an attractive 3.6% yield, and add more shares to my portfolio on quarterly basis.
In summary, there were no big surprises from either of these companies, as they both announced their dividends on the dates I predicted, and were within a penny of my expected payout rates.
Dr Pepper continues to pump out ~10% annual growth, and stays right on target with a 50% payout ratio. Meanwhile, Coke rewarded shareholders with a 5.7% increase to the payout despite the payout ratio growing to even higher levels. Dr Pepper has certainly been the better performer in my portfolio over the last few years, but I’m not counting out Coke yet, and will gladly accumulate more shares with my dividend reinvestments.
Looking ahead, Digital Realty Trust, Inc. $DLR and Xcel Energy Inc. $XEL are next on the list for announcements, and I am looking forward to their new dividend increases set for next week!