Friday, April 28, 2017

The Power, Potential and Pitfalls of Dividend Growth Investing with Coca-Cola

Part of my process for monitoring my investment holdings involves subscribing to news alerts related to the companies in my portfolio. Earlier this week, this article related to the impact that Coca-Cola's stock on various college endowments appeared in my news feed. To summarize the article, four colleges have a large portion of their endowment funded by the Lettie Pate Evans Foundation, which holds almost exclusively shares in The Coca-Cola Company. Due to Coke's growing dividends, hundreds of millions of dollars have been provided to the endowments of the colleges. The article triggered mixed emotions for me, as I feel it accurately depicts the power, potential and pitfalls of dividend growth investing.

The Power

With 95% of their assets invested in shares of Coca-Cola, the Lettie Pate Evans Foundation grew their assets from $7M in 1953 to $3B today (including 67 million shares of Coke). The approximate 10% compounded annual rate of return was due to share price appreciation, 55 years of dividend growth, dividend reinvestment and share splits. It is fascinating that 1 share of Coke in 1953 yielded 1152 shares today through stock splits alone!  

The power of dividend growth is reflected in the Evans Foundation generating approximately $100M of dividends on their shares of Coke. As the President of the Foundation indicates in the article "That [Coca-Cola] dividend has paid a lot of tuition over the years". As an example, Washington and Lee University expects to receive about $13M of dividends from their $400M investment in Coke through the Evans Foundation this year alone. 

The Potential

Given the long time horizons of endowment funds, dividend growth stocks such as Coca-Cola that consistently raise their payouts seem like the perfect investment. Much like early retirees aim to fund their expenses with dividend and interest income without touching their principal, endowments can use dividends to fund an increasing amount of scholarships and bursaries without impairing their capital base. The true challenge is to find quality companies to include in the investment/endowment portfolio that are capable of paying out higher amounts of their growing earnings via dividends for decades to come. Tat challenge leads to the primary pitfall evident for the Lettie Pate Evans Foundation and colleges mentioned in the article. 

The Pitfalls

The lack of diversification for the Lettie Pate Evans Foundation, with 95% of their assets invested in shares of Coca-Cola is terrifying. Berry College's 60% share concentration of Coca-Cola within their total endowment, the 29% concentration of Coke shares in Washington and Lee University's endowment, and even Georgia Tech's 25% concentration in Coke shares related to their endowment are equally alarming. I found myself perplexed reading that Georgia Tech, like most schools who benefited from the Lettie Pate Evans Foundation's Coca-Cola holdings does not consider that concentration when making asset allocation decisions for the rest of its endowment portfolio. Would these universities actually consider adding shares of Pepsico or Dr Pepper Snapple to their endowments while ignoring their high correlation to Coca-Cola? 

The quote that jumped out at me the most in the article was from the vice president for finance at Washington and Lee University indicating that "It's a great life jacket to have" when referring to the dividends generated by the Coca-Cola shares. Although it is easy to enjoy the growing stream of dividends derived from an investment, I think it would be wise for the vice president for finance to realize that past investment returns are not a guarantee of future success. As Coca-Cola's earnings have failed to grow in recent years, their payout ratio has increased, and future dividend growth will be challenging without a corresponding increase in earnings. I sincerely hope that the trustees for the Lettie Pate Evans Foundation and the various college endowments mentioned in the article make a greater effort to diversify their holdings in order to provide more stable funding in the future.

As dividend growth investors, we must harness the power of compound growth in dividends over time to realize the potential benefits of steadily rising passive income, without ignoring the pitfalls related to portfolio concentration and sustainability of payouts. As fascinating as it was to read how well the Evans Foundation and various college endowments had done due to their concentration in Coca-Cola shares, I found myself worried for the future prosperity of these institutions and the stakeholders they serve. 

What are your long-term views on Coca-Cola Co as an investment? 


  1. I still like KO as a long term investment. Your post really highlights what impact time can have on a long term holding with dividend raises, splits, compounding, reinvestment, etc. While I like KO long term I don't think it will ever be such a large portion of my portfolio. I would be able to sleep well at night having so much in just one stock.

    1. I 100% agree with you that as a long-term investment, KO fits the bill. Personally, I think it would be an excellent company to take private to capture the power of compounding. That said, the lack of diversification and high dependence that the institutions profiled in the article place on KO sustaining their dividend growth is shocking. Far too many eggs in one basket.


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