Why Income Investors Should Prefer “New” Coke to “Old” Coke

cce-stockThe Coca-Cola Company (NYSE: KO) just might be the premier dividend grower. The company has paid a quarterly dividend since 1920 and has increased the dividend each year for the past 50 years.
You’ll find Coca-Cola on every list of “dividend aristocrats.” It’s the safe and obvious bet. No money manager jeopardizes his job recommending Coca-Cola for an income-investment portfolio.
I, too, am on board with Coca-Cola. But that doesn’t mean I’m necessarily on board with The Coca-Cola Company (KO).
I see a more intriguing income and dividend-growth opportunity in “New Coke” –  Coca-Cola Enterprises (NYSE: CCE), the Western European bottler and distributor of Coca-Cola products.  CCE is the product of KO reorganizing its bottling operations in 2010.  (Hat tip to Top Stock Insights editor Tyler Laundon for introducing me to CCE.)
CCE’s and KO’s fortunes are, not surprisingly, intertwined.  Over 90% of CCE’s sales volume consists of KO products.  So an investment in CCE stock is an investment in the Coca-Cola brand, except on a more concentrated scale. KO is worldwide, CCE is regional, with Western Europe being the region.
Admittedly, Western Europe is hardly renowned for growth opportunities, and CCE isn’t much of a top-line growth story. From 2010 through 2013, annual revenue grew to $8.2 billion from $6.7 billion.  Year-over-year for 2013, revenue is up only 2%.
Then again, KO isn’t much of a top-line growth company. Its year-over-year revenue growth for 2013 is expected to be on par with a day-old open bottle of Coke – flat.
KO is a storied dividend-growth company, but CCE is writing its own dividend-growth story.
If we go back to the beginning of 2009 (a time that includes legacy CCE, which included U.S. bottling operations), CCE has increased its annual dividend at a 23.3% average annual rate.  Over the same period, KO increased its annual dividend at an 8.1% average annual rate.
KO will likely announce another dividend increase in the near future, with the release of four-quarter and fiscal-year 2013 financial results. If the increase exceeds 10%, I’ll be surprised.
CCE, on the other hand, already announced its financial results for the quarter and the year. The announcement included a 25% dividend increase to $1.00 a share for 2014.
As the dividend goes, so frequently goes the share price.  Look no further than the relative share-price performance of CCE and KO.  As the chart below reveals, CCE has far outdistanced KO on share-price appreciation over the past five years.  I suspect the relative rate of dividend growth influenced the relative rate of share-price appreciation.
ko-stockDespite raising the dividend in leaps and bounds over the past five years, CCE’s payout ratio is still a reasonable 41% based on 2013 EPS of $2.44.  Preliminary estimates are for CCE’s EPS to grow 17% to $2.86, which drops the payout ratio to 35%.  In contrast, KO’s payout ratio is 54% based on the $1.12 annual dividend and expected 2013 EPS of $2.08.
Since 2009,  KO’s EPS has grown roughly 9% year after year. CCE’s EPS has grown roughly 13% each year.  A higher rate of earnings growth enables a higher rate of dividend growth.
I’m insufficiently familiar with KO’s recent purchase of Green Mountain Coffee  (NASDAQ: GMCR) to comment on specifics.  I’m sure Green Mountain will help KO’s top and bottom  lines. I would be surprised, though, if it helps enough to enable KO to grow its dividend at the same rate as CCE.

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