Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Coca-Cola and Johnson & Johnson Earnings Signal a Dividend Renaissance
Transcript
- Lucas: Coca-Cola up seven and a half percent this week. Johnson & Johnson up four and a half. The S&P 500? Down nearly one percent. That's the kind of divergence that gets your attention if you're a dividend investor. Luna: It does. And it's not just a blip — both companies reported earnings this week that beat expectations and showed exactly why their dividends are on solid ground. Lucas: Let's start with Coca-Cola. They reported on Tuesday morning, and the market's reaction was almost immediate. Revenue came in above consensus, but more importantly for us, their free cash flow generation was strong enough to cover the dividend more than two times over. That's a coverage ratio of over 200 percent. Luna: So the dividend is well-covered. But what about growth? One of the criticisms of Coke is that it's a slow-growth business. Lucas: Fair point. And actually, Coca-Cola showed organic revenue growth of about 6 percent year-over-year, driven largely by price increases and mix improvements in international markets. They're not going to double your money overnight, but that steady growth in earnings per share supports a dividend that's been raised for 63 consecutive years. That's the kind of reliability the market is rewarding right now. Luna: And Johnson & Johnson followed a similar playbook. Their earnings report also beat estimates, and their dividend coverage ratio is even higher — something like 2.5 times free cash flow. Lucas: Right. JNJ's pharmaceutical segment showed strong growth, and their medical devices division is stabilizing. The key metric for us is that free cash flow after capex easily covers the dividend, and they've been increasing the payout for over 60 years as well. Luna: Both of these companies are classic defensive holdings. But what's interesting is that they're outperforming not just the S&P 500, but also the Nasdaq, which is down over 3 percent this week. Lucas: Exactly. The tech selloff is accelerating — the Nasdaq dropped more than 3 percent in five days. And that's pushing investors into safer havens. Dividend aristocrats like Coca-Cola and Johnson & Johnson become the natural landing spot. Luna: And it's not just about safety. The yield curve is steepening again. The 10-year Treasury yield fell from 4.69 to 4.65 this week, while the 2-year dipped slightly. That spread is now 34 basis points, down from 36. Lucas: A steepening curve, especially when long-term yields are falling, makes dividend stocks more attractive relative to bonds. If you can get a 3 percent dividend yield from Coke — which yields about 2.8 percent — and that dividend is growing at 6 percent a year, the total return proposition starts to look a lot better than a 10-year Treasury yielding 4.65 percent that doesn't grow. Luna: Especially when you factor in that bond yields might continue to fall if the economy softens. The Fed is on hold at 3.63 percent, and the market is pricing in rate cuts next year. Lucas: Right. So the dividend reinvestment becomes a powerful compounding engine. That's the core of the dividend renaissance narrative — these aren't old-economy relics, they're cash flow machines. Luna: Let's talk about that free cash flow coverage in more detail. For Coca-Cola, the dividend costs about 7 billion dollars a year. Their free cash flow last year was over 10 billion. That's a cushion of over 40 percent. Lucas: And for Johnson & Johnson, free cash flow was about 18 billion against a dividend obligation of roughly 11 billion. So a coverage ratio above 1.6. Both are very healthy. But the market is now rewarding the ones that can maintain that coverage even in a potentially slower economy. Luna: And that's the contrast with high-yield stocks that might have unsustainable payouts. For example, some MLPs or REITs have yields above 6 percent but their coverage ratios are tighter. Lucas: Exactly. Dividend growth beats high yield when the economy turns. That's a theme we've touched on before, but this week's earnings confirm it. Coca-Cola and Johnson & Johnson are the poster children for that approach. Luna: What about the rest of the market? The Dow is up 1 percent, largely thanks to these stocks. The S&P 500 is down slightly, but the equal-weight S&P 500 is actually flat. So it's a narrow selloff driven by mega-cap tech. Lucas: That's a good point. The NASDAQ's decline is dominated by names like Meta and Nvidia. But the dividend-heavy Dow is holding up. It's a classic rotation out of growth and into value. Luna: And this rotation might have legs. If earnings season continues to show strength in consumer staples and healthcare, dividend stocks could keep outperforming. Lucas: That brings up an important consideration for income investors: the yield on the S&P 500 overall is about 1.3 percent. But if you build a portfolio of dividend aristocrats with yields around 2.5 to 3.5 percent and growing dividends, you're setting yourself up for a much better income stream over time. Luna: And the total return can be competitive too. Over the past decade, the Dividend Aristocrats index has actually outperformed the S&P 500 with lower volatility. Lucas: Let's circle back to what's driving the earnings beats. Coca-Cola benefited from pricing power in emerging markets. Johnson & Johnson had a strong quarter for new drug launches. Both managed their costs well. That's the kind of operational efficiency that supports dividends. Luna: And the market is paying attention. The options market shows that implied volatility for both stocks is low, suggesting investors aren't expecting big surprises. They're seen as steady. Lucas: One risk to watch is if the Fed signals a rate hike. But right now, the Fed funds futures suggest no move through year-end. The flat rate environment is actually supportive for dividend stocks because it keeps the yield on cash low. Luna: Right. Money market funds are yielding around 3.6 percent, which is competitive with dividend yields. But that yield is taxable as ordinary income, while qualified dividends get preferential tax treatment. Plus, dividends can grow. Lucas: That's a crucial distinction. The after-tax return on a 3 percent dividend from a company like Coke could be significantly better than a 3.6 percent money market yield, depending on your tax bracket. Luna: So for long-term investors, dividend stocks still make sense. And the current market rotation is just reinforcing that. Lucas: The kind of analysis we've been doing — looking at coverage ratios and free cash flow — is exactly the lens we try to bring to every stock we discuss on this show. If you find these conversations useful, you can support the work that goes into them at buymeacoffee.com/fexingo. It helps us keep the show ad-free and focused on the numbers that matter. Luna: Yeah, it's a small way to keep this resource alive. And we appreciate every bit of support. Lucas: Now, the other thing about Johnson & Johnson's earnings that stood out was their pharmaceutical segment's pipeline. They have several drugs that are patent-protected through the rest of the decade, which provides visibility on future cash flows. Luna: That's key for dividend sustainability. If you know the revenue stream is locked in, you can be confident the dividend will continue to grow. Lucas: Exactly. And Coca-Cola has similar visibility through their bottling contracts and global distribution network. Both have competitive moats that are hard to replicate. Luna: So for investors looking to add positions, the question is valuation. Coca-Cola trades at about 25 times earnings, Johnson & Johnson at about 16. That's a premium for Coke, but you're paying for that growth and stability. Lucas: And compared to the S&P 500 which is at over 22 times, they're not outrageously expensive. Especially when you factor in the dividend. The yield on JNJ is about 3.2 percent, which historically is on the higher side. Luna: So if you're an income investor, this week's earnings reports offer a clear signal: the dividend growth model is working. And in a market that's starting to favor defensive stocks, these two are leading the charge. Lucas: Next week we'll look at another batch of earnings from the dividend space. But for now, the takeaway is clear: strong free cash flow coverage, a steepening yield curve, and a rotation out of tech are all aligning to make dividend aristocrats the place to be.