With a 7% surge within a single month, questionssurface about Coca-Cola's stock potential to reach an unprecedented peak.
The S&P 500 and Nasdaq Composite have seen a slight increase of over 1% in the past month. In contrast, the consumer staples sector has witnessed a significant climb of over 4% during this period. A key contributor to this sector's growth has been Coca-Cola (symbol KO, down by 0.58%), which has experienced a surge of 7.4% in the last month alone. This growth has brought Coke's stock price close to its all-time high of $64.99 per share, set on April 24, 2023.
Here's why Coca-Cola has the potential to surpass its all-time high, making it an attractive investment opportunity.
A company of stability and predictability
Among the thousands of companies listed on the U.S. stock market, Coca-Cola stands out as one of the most consistent and dependable ones. This consistency stems from the simple fact that when you invest in Coke's stock, you know exactly what you're getting.
You're likely familiar with many of Coke's popular beverage brands, such as Gold Peak tea, BodyArmor and Powerade sports drinks, Costa Coffee, Schweppes and Topo Chico seltzers, Dasani water, Minute Maid juices, Sprite sodas, Vitamin Water, and more. Even if you're not familiar with the specifics of the business, you can understand how Coke generates revenue.
Coke's strategy involves building a strong brand portfolio across various beverage categories and generating profits that can be reinvested in the business, increase the dividend, and buy back shares. Executing this strategy may be complex, but the concept is straightforward.
From an investment standpoint, Coke sets clear expectations for its shareholders. It's not aiming for exceptional sales or earnings growth, but it needs to deliver strong performance throughout economic cycles while growing earnings at a similar pace to the dividend to avoid pushing its payout ratio too high. To achieve this, Coke must ensure that its acquisitions pay off, that it manages its supply chain effectively, and that it avoids becoming too complacent and inefficient.
A successful turnaround
Historically, Coke has done well in meeting its objectives. However, in 2017, it faced a significant challenge, with its sales dropping by 15% in a single year and its margins being compressed. Coke has since managed to turn its business around and is now on the brink of surpassing its sales record from more than a decade ago, thanks to strong pricing power.
Coke's struggles during the mid-to-late 2010s serve as a reminder that even highly successful companies can encounter setbacks. However, a successful turnaround can help restore investor confidence and establish a reputation for consistency and reliability.
A secure and generous dividend
Coke's dividend is one of the most reliable payouts in the market. For 62 consecutive years, the company has paid and increased its dividend, earning it the title of a Dividend King. The most recent rise of 5.4% brings the quarterly dividend to $0.485 per share, or $1.94 per year, offering a yield of 3.1%.
While many well-known Dividend Kings with a history of dividend increases can be found in the market, few offer yields as high as Coke's. Companies like Walmart and Procter & Gamble are also Dividend Kings in the consumer staples sector. However, Walmart offers a yield of less than 1.5%, while P&G's yield is 2.4%.
Coke's generous dividend is secure due to its recession-resistant business model and improvements to its financial health. The company's key financial indicators, such as its total net long-term debt, debt-to-capital ratio, and financial debt-to-equity ratio, have all reached their lowest levels in five years. A robust balance sheet and a manageable debt position provide more room for dividend increases and share buybacks.
As Coke's business has improved, it has purchased more of its own stock. Over the past 12 months, it has conducted approximately $1.5 billion in buybacks, which is among the highest levels in five years.
Coke also has a reasonable valuation, with a price-to-earnings ratio of 25.3 and a forward price-to-earnings ratio of 22.4. Considering the 10-year median price-to-earnings ratio is 27.3, Coke's stock price represents a good value, especially with its high yield.
Coke remains an excellent investment opportunity
Coke's internal inefficiencies and acquisitions like Costa in 2019 and BodyArmor in 2021 had left the company vulnerable to sales and margin pressure. However, Coke has recovered and entered a growth phase once again.
The business and its financial health are in their best shape in years, enabling Coke to make significant dividend increases and stock buybacks.
Even as it approaches the threshold of its all-time stock price high, Coke remains an attractive investment opportunity with a high yield. It represents an excellent passive income play for risk-averse investors or individuals looking to supplement their income in retirement.
In the context of Coca-Cola's financial performance, investing in its stock could provide a steady source of income. The company's consistently high dividends, with a yield of 3.1%, have been increased for 62 consecutive years, making it a Dividend King.
Moreover, Coca-Cola's financial health has improved significantly in recent years. Key indicators such as its total net long-term debt, debt-to-capital ratio, and financial debt-to-equity ratio have all reached their lowest levels in five years, which contributes to the security of its dividend payouts.
