Coca-Cola (NYSE:KO) stock has remained a steady, profitable, long-term investment for as long as anyone can remember. Amid worldwide saturation, cola wars, and wars against soft drinks themselves, the consumer staples stock continues to deliver returns, although perhaps at a somewhat slower pace than in decades past.
Considering this slower growth, is this a stock worth buying as the final quarter of the year begins and 2021 arrives? Let's take a closer look.
The state of Coca-Cola stock
Coca-Cola stock has delivered considerable returns over the last 100 years. One share of the company purchased before 1927 has split into 9,216 shares.
However, the performance over the last 10 years has yielded less dramatic results. Coca-Cola has grown by about 80% during that time, significantly underperforming the S&P 500's 188% rise over the same timeframe.
More recently, it still has not returned to its pre-pandemic high. Although it has moved higher since the lows in March, it sells for more than a 15% discount from the February peak.
Still, Coca-Cola has faced the challenge of attracting customers who have lost interest in soft drinks. To accommodate these tastes, Coca-Cola has acquired or developed a diverse collection of over 500 brands worldwide.
Now Coca-Cola wants to refocus its portfolio on a combination of globally known beverages and popular regional and local brands. As things stand now, half of Coca-Cola's offerings account for about 2% of overall sales. The company plans to eliminate many of these labels. To this end, Coca-Cola began in August to shut down brands such as Odwalla and boost Minute Maid, Topo Chico, and other popular beverages.
Still, savvy investors may see this lower price as the opportunity. The current forward price-to-earnings (P/E) ratio of around 23 is near historical averages. With net income struggling to top 1% in some years, that may explain why the stock has not moved higher rapidly.
However, investors looking for something above-average about Coca-Cola stock will find it in the dividend. The company has hiked its payout in each of the previous 59 years, making the stock a Dividend King. Moreover, in 2020, investors will receive $1.64 per share in annual payouts. This amounts to a yield of 3.2% for stockholders.
The dividend payout ratio (the percentage of net income that goes to pay the dividend) is approximately 76%. Though that may seem high, the dividend still appears sustainable.
During the most recent quarter, the company posted a non-GAAP revenue decline of 26% year over year. A drop in earnings per share of 33% also occurred during the same period. Outings to restaurants and events account for a significant percentage of the company's revenue (nearly half in the U.S.). With these activities curtailed by COVID-19, both the top and bottom line suffered. Additionally, non-GAAP free cash flow of $2.3 billion fell by 40% from year-ago levels.
However, that still covered the $1.76 billion cost of the dividend during the quarter. Furthermore, since the country (and the world) continues to show signs of slowly recovering from COVID-19, analysts have forecasted an increase in earnings of more than 14% for next year. This should lead to a recovery in cash flows. For this reason, the dividend increases can and likely will continue.
Should I buy before 2021?
Whether to buy this stock before 2021 depends on the type of investor. Nonetheless, Coca-Cola is an excellent choice for income-oriented investors.
With the average S&P 500 stock yielding about 1.8%, Coke investors will earn about 75% more dividend cash yield than average. Additionally, with its streak of dividend increases going on 60 years, Coca-Cola is unlikely to let go of its Dividend King status.
Moreover, in past years, dividend hikes usually occur at the beginning of the year. This would indicate that investors who buy late in 2020 can assume a payout hike will come soon.
Furthermore, investors could see a bump as Coca-Cola's sales return to pre-pandemic levels. Assuming this helps boost the stock, investors should gain an additional return on the stock's value, especially if they buy this year.
Those increases will probably not attract prospective buyers looking for growth. However, if investors thirst for an above-average cash return and a stock more likely to rise than fall in value, they may want a taste of Coca-Cola before New Year's Day.