Coca-Cola (NYSE:KO) pays a forward dividend yield of 3%, and it's raised its payout annually for over half a century. That makes it a Dividend King, an elite title given to S&P 500 companies that have hiked their payouts for at least 50 straight years.

Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is also Coca-Cola's top shareholder, with a stake of about 9.4%. Buffett once famously quipped that he drank so much Coca-Cola that he was "one quarter Coke."

Those two facts suggest that Coca-Cola is a sound investment. A fact suggesting the opposite is the growing number of consumers who now shun soft drinks from companies like Coca-Cola in favor of healthier alternatives, which raises concerns about its long-term growth.

Let's examine some of the headwinds and tailwinds affecting the company to see where Coca-Cola might end up in five years.

Image source: Getty Images.

Is Coca-Cola's growth decelerating?

Coca-Cola's biggest long-term headwind is declining soft drink sales. Soda consumption in the U.S. is currently at a three-decade low according to Beverage Digest, and that weakness is reflected in other countries. Tougher regulations, including soda taxes in several markets, are also discouraging consumers from buying sugary sodas.

Coca-Cola is trying to counter that downturn by diversifying its portfolio of non-carbonated drinks (including tea, juice, bottled water, and energy drinks); refreshing its carbonated products with lower-calorie versions, smaller serving sizes, and new flavors; and expanding through investments and acquisitions, including its near-19% stake in Monster Beverage (NASDAQ:MNST) and its recent acquisition of Costa Coffee.

The success of that plan is a polarizing issue for investors. The bulls note that Coca-Cola's organic growth -- which excludes currency headwinds and the impact of acquisitions, divestments, and the refranchising of its bottling operations -- stayed positive in recent years. The bears note that its reported growth, which includes all those bumps, tells a different story:

Fiscal year

2014

2015

2016

2017

2018

Organic sales

3%

4%

3%

3%

5%

Reported sales

(2%)

(4%)

(5%)

(15%)

(10%)

Coca-Cola's year-over-year revenue growth. Source: Coca-Cola financial reports.

Coca-Cola's reported revenue growth faced two major headwinds: the strength of the U.S. dollar and the refranchising of its bottling operations. Coca-Cola previously bottled and sold a large portion of its beverages, which generates up to five times as much revenue per drink as concentrated syrup. But that's a capital intensive business which throttles its margins -- so it refranchised a large portion of its bottling operations to independent bottlers in recent years. That strategy boosted its margins but widened the gap between its organic and reported sales.

The main tailwinds

On the bright side, those top-line headwinds could fade soon. The dollar could weaken, regional currencies could recover, and Coca-Cola already concluded its refranchising efforts in most of its major markets -- including North America, China, Japan, Canada, and Latin America.

If we examine Coca-Cola's unit case volume and regional growth, its core business still looks healthy. Coca-Cola's unit case volume grew annually across all its global regions in 2018 except for Latin America, which posted flat growth. Its organic revenue rose across all regions except for North America, where growth stayed flat. Those results indicated that Coca-Cola's portfolio expansion was paying off and that it was offsetting the weakness of its flagship soda brands with other beverages.

Image source: Getty Images.

Coca-Cola's comparable gross margin also expanded from 62.7% in 2017 to 63.1% in 2018, and its comparable operating margin rose from 26.9% to 30.8%. It attributed those margin improvements to the divestments of several bottling operations, ongoing productivity and cost-cutting efforts, and the de-prioritization of lower-margin products (like water and tea) in certain markets. Those improvements indicate that Coca-Cola's earnings aren't headed off a cliff.

Coca-Cola expects its organic revenue to rise 4% this year, and for its comparable EPS to stay roughly flat. It expects its takeover of Costa to be "slightly accretive" to its 2019 earnings, but it hasn't provided any longer-term guidance for the new subsidiary.

The long-term forecast and valuations

Wall Street expects Coca-Cola's earnings to rise an average of 5% annually over the next five years. Its rival PepsiCo (NASDAQ:PEP), which has a more diversified portfolio of drinks and packaged foods, is expected to generate 4% annual earnings growth during the same period.

Based on those forecasts, Coca-Cola and PepsiCo have 5-year PEG ratios of 5.0 and 6.4, respectively. Stocks with PEG ratios under 1 are considered undervalued, so neither soda stock looks cheap relative to its long-term earnings growth. In fact, both stocks look a bit overvalued at current prices -- presumably because investors flocked to them as defensive plays amid macro headwinds.

Investors should take analysts' long-term forecasts with a grain of salt, but mid-single-digit earnings growth sounds accurate for Coca-Cola and PepsiCo. Neither company will fade away within the next five years, but both must carefully optimize their brands, cut costs, and make smart acquisitions or investments to keep squeezing out positive growth.

The bottom line

Coca-Cola is still a sound long-term investment, but investors shouldn't be in a hurry to buy the stock right now at 23 times forward earnings, especially when there are plenty of other Dividend Aristocrats and Dividend Kings with higher yields and lower valuations.

Coca-Cola's stock will probably be trading higher in five years, but I'm not convinced that it will outperform the broader market -- especially if positive news (like a trade deal with China) causes investors to dump defensive stalwarts like Coca-Cola to buy more aggressive growth stocks again.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Monster Beverage. The Motley Fool has a disclosure policy.