The Coca-Cola Company (NYSE:KO) recently announced an increase in its revenues, operating margins, and free cash flow for 2023 and the fourth quarter. This positive news has raised expectations for a potential dividend hike, which could give KO stock a 3.25% yield, making it an attractive option for value investors.
Coca-Cola reported a 7% increase in revenues for the quarter and a 2% increase for the full year 2023. Additionally, its operating margin improved to 21.0% from 20.5% in the previous year. Despite a slight decrease in its free cash flow (FCF) margin from 22.2% to 21.3%, the company’s FCF increased to $9.75 billion in 2023, up 2% from $9.54 billion in 2022.
The increase in capital expenditures, which rose by nearly 25% to $1.85 billion, may have contributed to the decline in the FCF margin. However, the company’s FCF remained strong, indicating robust financial performance.
Investors are anticipating a dividend hike, as Coca-Cola has a history of increasing its dividend for the past 61 years. In 2023, the company’s declared dividend per share (DPS) was $1.84, compared to $1.76 in 2022, representing a 4.55% increase. If the quarterly dividend is raised to 48 cents from 46 cents for 2024, it would result in a 4.34% DPS hike and a 3.25% dividend yield based on the current stock price of $59.08 per share.
Coca-Cola’s share buyback program, totaling $1.7 billion in 2023, has helped reduce the number of shares outstanding. This has allowed the company to increase its DPS slightly higher than the additional cost of dividends, benefiting investors.
Looking ahead, Coca-Cola expects organic revenue growth of 6% to 7% in 2024 and comparable earnings per share (EPS) growth of 4% to 5%. Analysts project EPS of $2.81 in 2024, which would represent a 4.46% increase. Based on this, KO stock is currently trading at a reasonable forward multiple of 21x.
If FCF margins remain stable at 21.3%, FCF could reach $10 billion in 2024, assuming $47 billion in revenue. This implies a market cap of $266.7 billion using a 3.75% FCF yield metric, which is about 4.6% higher than the current $255 billion market cap. This translates to a price target of $62.55 per share.
In conclusion, Coca-Cola’s strong FCF growth, potential dividend increase, and stable financial performance make KO stock an attractive long-term investment for value investors.
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