The Dividend King That Fell 28% Yet Outpaces Coke and Pepsi on Two Key Metrics

What Makes a Dividend Really Safe? Look at the Payout Ratio

When evaluating dividend stocks, most investors fixate on yield alone. But there’s a hidden metric that separates reliable dividend payers from accident-waiting-to-happen situations: the dividend payout ratio formula, which is simply dividend per share divided by earnings per share.

This single calculation reveals everything. A payout ratio below 60% signals a company has substantial room to maintain or grow its dividend even when earnings stumble. Push above 100% and you’re watching a company cannibalize its core business to fund shareholder payments—a red flag that should trigger immediate caution.

When the Market Mispricers a Dividend Stock

Target (NYSE: TGT) presents a textbook example of mispricing. Down 28% in 2025, the retailer faces genuine headwinds: sluggish sales growth, compressed operating margins, and persistent consumer spending weakness. On the surface, this looks like a dividend trap waiting to snap shut.

But the data tells a different story entirely.

Target maintains a 4.5% yield—higher than Coca-Cola’s 3% and Pepsi’s 4.1%—while simultaneously running a lean payout structure. The company’s payout ratio sits at just 54.8%, comfortably healthy territory. To put this in perspective, Coca-Cola operates at 66.7% (still safe, but tighter) while PepsiCo has crossed above 100%, meaning it’s paying dividends that exceed its annual earnings.

Free cash flow tells an even more compelling story. Target generates nearly 50% more FCF than it distributes as dividends, whereas both Coca-Cola and PepsiCo are distributing more in dividends than they generate in FCF. This inversion of the typical relationship signals potential trouble ahead for the latter two, despite their legendary dividend aristocrat status.

The 53-Year Dividend Streak Matters Less Than You Think

Target, Coca-Cola, and PepsiCo all qualify as Dividend Kings—companies maintaining 50+ consecutive years of dividend payments and annual increases. PepsiCo has raised its payout for 53 years straight. Coca-Cola for 63 years. Target also hit 53 years.

Yet consistency doesn’t guarantee safety. Target’s recent raises have been minimal—less than 2% annually for three consecutive years—a dramatic pullback from the 20% surge in 2022. This restraint isn’t weakness; it’s prudence. Management is deliberately avoiding dividend expense growth that would force impossible payout ratios amid a business turnaround.

Contrast this with Coca-Cola and PepsiCo, which continue boosting payouts even as their balance sheets show rising dividend expense relative to earnings generation. The question becomes: how much longer can they sustain this?

The Valuation Kicker Nobody’s Talking About

Target trades at 14x forward earnings—a significant discount to PepsiCo (16.3x) and Coca-Cola (21.1x). This isn’t just cheaper; it’s historically cheap for a Dividend King with Target’s profitability profile.

Despite sales contraction, Target remains a high-margin operator. The company still books substantial earnings and generates the cash to fund dividends with room to spare. For a business supposedly in “deep turnaround,” the financial architecture is surprisingly robust.

Here’s the math that matters: if Target’s earnings grow at just low-to-mid-single-digit rates (a conservative assumption given its market position), and the company raises its dividend in line with that earnings growth, shareholders lock in a 4.5% yield on a stock down 28%. Even without capital appreciation, that compounds into meaningful wealth creation over a decade.

Why Some Income Investors Will Still Pass

Target operates exclusively in the U.S. market, meaning it carries concentrated exposure to American consumer spending trends. Coca-Cola and PepsiCo derive substantial revenue from international markets, providing geographic diversification that many portfolio managers consider essential.

Additionally, both Coca-Cola and PepsiCo command globally recognized brand portfolios—Coke in beverages, Pepsi across beverages plus snacks and mini meals. Target’s business model, while currently profitable, hinges on executing a store renovation and product remix strategy amid uncertain consumer sentiment.

For risk-averse investors, the safer psychological choice remains Coke or Pepsi despite their elevated payout ratios and deteriorating FCF dynamics. Brand moats and international reach provide a comfort buffer that Target’s turnaround story hasn’t yet earned back.

The Actual Trade-Off for Patient Capital

Target represents a genuine asymmetric opportunity for investors with a three-to-five-year time horizon. The downside protection comes from an attractive current yield that requires no recovery to generate returns. The upside emerges from a low valuation combined with a fortress balance sheet relative to dividend obligations.

Yes, the retailer faces near-term challenges. Yes, consumer spending remains uncertain. But the dividend itself—the income component investors actually care about—sits on firmer ground than the more celebrated dividend aristocrats currently trading at premium valuations with deteriorating fundamental cash dynamics.

The irony: the market has priced in disaster at Target while giving Coca-Cola and PepsiCo a pass, despite the latter two running payout ratios that leave little margin for error. Sometimes the best income opportunities hide in the stocks everyone’s already written off.