Coca-Cola Has Not Finished Minting Millionaires Yet

Back when I started writing for Seeking Alpha in 2011, I noted the obvious that everyone else in the stock commentary blogosphere knows: Coca-Cola is a damn good company to own for long periods of time.

I think though, it’s entirely possible that it gets written about so much that people put up blinders to the notion of accumulating Coca-Cola stock in their portfolios now. That’s a shame, because the company is continuing to create wealth, but in a way that doesn’t necessarily make you feel as if you are the owner of a life-changing asset in the moment.

But yet, the figures continue to trickle upward: at the time I started writing about personal finance stuff, Coca-Cola was paying out $0.235 per quarter to shareholders (I’m adjusting the figures to represent the 2012 split). By 2012, that quarterly figure grew to $0.255 per share. Then, in 2013, the payout went up yet again to $0.28 quarterly. And now, here we are in 2013, and you are collecting $0.305 per share. There’s a reason you don’t see a lot of people refer to themselves as former dividend growth investors; why would you give up a company that does this, year after year?

Imagine owning something like this when you hit your mid-life stride. To get your hands on 1,000 shares of Coca-Cola stock in 2011, you would have had to write a check for between $30,000 and $35,000, depending on the price of your entry. Or, you could have been gradually accumulating your position by purchasing $150 worth of Coca-Cola every month from 2001 through 2011, and you would have gotten your hands on 1,000 shares through the combination of $18,000 worth of your own investment plus $12,000-$14,000 worth of capital appreciation on Coca-Cola’s part, as you experienced in the beverage giant’s growth as you built up your position.

Once you have an ownership position implanted, then you really start to feel as if you are building wealth by just staying alive—taking money from your job to make new investments is nice if you can do it, but it’s no longer the necessary condition to move the needle forward in your own life like it once was.

In the case of Coca-Cola, you saw $0.94 in dividends come your way in 2011. Those $940 in cash available to you could then be plowed back into an additional 29 shares of the soda giant (Note: I am using the average price of the stock during the year to calculate the reinvestment price, so my results differ a bit from actual reality but I am building some conservatism into the calculations by assuming lump-sum reinvestment each year rather than new shares paying higher dividends each quarter, as would be the case in real life).

So now, you are armed with 1,029 shares in 2012, just in time for the dividend increase to $1.02 per share. Not only are you getting $1,020 in dividends from the 1,000 shares you initially accumulated, but those brand new 29 shares are pumping out $29.58 all their own as well, to bring your total income to $1,049.58, a 11.65% increase from a year earlier because you chose to reinvest your dividends. That’s a nice addition that doesn’t always get picked up when you hear the announcement that Coca-Cola increased its dividend 8.5% from $0.94 annually to $1.02, you get an extra three percentage points added to the top by electing to reinvest.

As the earnings and dividends increased, so did the price of the stock at the time of reinvestment (when you own companies that consistently grow earnings and dividends, you get used to this) to $36.30 so that you added another 29 shares to your account if you chose to reinvest your dividends automatically.

When 2013 came knocking on the door, your ownership position had risen to 1,058 shares. Meanwhile, Coca-Cola continued to do what it has been doing for half-a-century; raise the dividend up to $1.12 per share. Now, you have $1,184 coming your way each year. Reinvested at a little over $39 per share, you picked up 30 new shares heading into 2014.

This brings us to 2014, where the dividend went up to $1.22 per share for the course of the year. A lot of people say, “Coca-Cola, yeah, I get it, it’s about building wealth slowly. But I need to move faster—it hit a high of almost $36 per share in 2011, and now it’s at, what, $41 per share? Is that all? $5 per share in capital appreciation, during what people are calling a raging bull market? That kind of thinking ignores an invisible force: those dividends that kept doggedly increasing your share count.

If we assume that 2014 Coca-Cola shareholders reinvested their dividends at an average price of $40 per share, then they picked up another 33 shares, bringing their grand total to 1,121 shares assuming full dividend reinvestment during the 2011-2014 period. It’s understandable how people get conditioned to just look at share price changes and assume that’s the story of a stock, but it’s an incomplete story. Those 121 shares picked up from 2011-2014 have value; as you can sell them for $4,961 if you so desire, or you can recognize that you added $147 in annual income just from the creation of new shares, without factoring in the growth of the dividend as well. The nature of reinvested dividends into new shares is that they capitalize upon themselves, and as the profits and dividends of the underlying company increases, so does the amount of money you could theoretically sell the company for (although why would you want to relinquish a dream holding?).

When people say they don’t see the “magic” with a stock like Coca-Cola, it’s because they are just looking at the change in share price from almost $36 per share in 2011 to $41 per share today. But counting dividends, it’s not that $36,000 turned into $41,000, but rather, that $36,000 turned into just under $46,000.

On the income side, your 1,000 shares that were producing $940 each year at the start of 2011 would have grown into 1,121 shares producing $1,367 heading into the 2015 dividend increase. The income growth you would be receiving in dividends amounted to 45% when you compare your start of 2011 figures to your end of 2014 figures. In a CNBC interview, Warren Buffett basically came out and said that Coca-Cola would be worth around $60 per share four years from now. The dividend has been increasing for half-a-century. But people always get distracted because they want to find something new and shinier. Meanwhile, the folks that say—“No more excuses, I’m going to build a sizable position in the most obvious company to own in the world”—get to actually reap that 45% total income growth from 2011 through 2014. Coca-Cola is still minting millionaires if you look closely enough at the full scope of what’s going on.


Originally posted 2014-07-11 08:00:43.

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