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Is This Iconic Dividend Growth Stock a Buy for 2022?

By Kody Kester – Dec 28, 2021 at 7:10AM

Key Points

  • The beverage maker reported double-digit percentage revenue and earnings growth in Q3.
  • Coca-Cola's financial position is one of strength, backed up by its decent interest coverage ratio.
  • Thanks to underperformance this year, the stock is still trading at a reasonable valuation.

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Coca-Cola is positioned to capitalize on growth opportunities in international markets.

As 2021 ends, the S&P 500 has returned 28% year to date. But in a market of stocks rather than a stock market, not all stocks have done as well for shareholders. Enter the mega-cap beverage maker Coca-Cola (KO 0.11%), whose stock price has only appreciated 6% over that same time frame. 

With Coca-Cola only a few percentage points away from its all-time high of $60 a share set in February 2020, investors may be wondering whether the stock could be a compelling buy for next year and beyond. Let's look further at Coca-Cola's fundamentals, growth potential, and valuation to come up with an answer to that question.

Three people toast their glasses during a pizza dinner.

Image source: Getty Images.

Coca-Cola turned out a solid quarter

Coca-Cola managed to deliver an impressive third quarter (ending Oct. 1) for its shareholders, beating analysts' estimates on both revenue and non-GAAP (adjusted) earnings per share (EPS).

The company reported $10.04 billion in net revenue during the quarter, which represents a 16.1% growth rate against the year-ago period. This topped the analyst consensus estimate of $9.72 billion for the quarter. So how did Coca-Cola pull this off?

Coca-Cola flexed its pricing-power muscles earlier this year by passing on rising commodity costs to consumers. This accounted for a 6% year-over-year increase in net revenue. And despite these price hikes, consumers appeared to remain loyal to the company's portfolio of brands.

Lessening coronavirus uncertainty in markets and increased concentrate sales to bottlers during the quarter led the company's net revenue 8% higher year over year. Each of Coca-Cola's four reportable regions were able to post low-single-digit to high-single-digit unit volume growth over last year as the world continued to adapt to living with COVID-19.

It's especially worth noting that Coca-Cola's consolidated unit volumes for the quarter were ahead of the pre-COVID-19 levels reported in 2019. This demonstrates that the company has fully recovered from the impact of the pandemic on its business.

Finally, the remaining growth in Coca-Cola's net revenue was the result of favorable currency translations. 

Coupling Coca-Cola's higher revenue base with a 50-basis point expansion in non-GAAP net margin to 28% helped to grow its non-GAAP EPS 18.2% year over year to $0.65. This came in well above the analysts' average EPS forecast of $0.58.

A lengthy international runway

Coca-Cola's recent operating results are encouraging. But here's another question investors may have: Can the company continue to generate robust growth going forward? Based on Coca-Cola's room for growth in international markets, I believe the answer to this question is a resounding "yes."

For example, Coca-Cola's volume share is just 5% in developing markets like India, which make up 80% of the global population. In efforts to grow developing market share, the company recently rolled out its Coca-Cola Zero Sugar new recipe in more than 50 countries, according to Chairman and CEO James Quincey's opening remarks during the company's latest earnings call.

Coca-Cola's focused product launches and approach to marketing are showing signs of paying off in recent quarters, which is why analysts anticipate its annual earnings growth will accelerate to nearly 10% through the next five years.

The business is rather solvent

Coca-Cola's long-term growth prospects appear promising. But another key factor to consider is the company's financial strength.

Coca-Cola's year-to-date interest coverage ratio is 8.7 ($10.69 billion in earnings before interest and taxes divided by $1.23 billion in interest expenses). While this isn't as strong as PepsiCo's (PEP -0.03%) year-to-date interest coverage ratio of 12.3 ($8.96 billion in EBIT divided by $731 million in interest costs), Coca-Cola's EBIT would need to fall nearly 90% before it would encounter significant financial difficulties. This suggests that Coca-Cola is financially sound.

Coca-Cola is a strong income and growth hybrid

Coca-Cola's fundamentals suggest that it is a stock worth considering for many investors. But is it a buy at its current valuation?

At its current $58.54 share price, Coca-Cola is trading at a forward P/E ratio of 22.9. This is lower than the industry average of 25.9. The analyst forecast of 10% annual earnings growth for the medium term is only a bit below the expected industry average growth forecast of 11%, which further proves that Coca-Cola is trading at a reasonable valuation.

Coca-Cola's bright future of growth should allow for the stock to build on its reputation as a Dividend King with 59 consecutive years of payout increases under its belt. And investors can acquire the stock's market-beating 2.9% dividend yield at a reasonable valuation. That's why I believe Coca-Cola is an attractive stock for income investors looking for moderate growth going forward.

Kody Kester owns PepsiCo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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