It pains me to say this because Coca-Cola (KO 0.30%) is an iconic U.S. brand that is instantly recognizable and synonymous with American culture worldwide, but after a huge run over the past month or so, shares look overvalued. The recent surge has further accentuated the fact that shares are trading at a very expensive valuation for a company with little to no growth over the last few years, and at this point I view Coca-Cola as a hold rather than a buy.
High valuation, low growth
In a market where earnings multiples are getting a haircut in fast and dramatic fashion, you can make a case for owning the highest-growth companies at a price to earnings multiple of 30 times, meaning that a stock's market cap is worth 30 times the profit it earns in a year. Even many hardcore value investors can see the merit of buying a company like Alphabet (NASDAQ:GOOG) at 27 times earnings or the newly renamed Meta Platforms (NASDAQ:FB) at 24 times earnings. Unfortunately, Coca-Cola is not one of these hyper-growth companies, but 30 times earnings is exactly where it finds itself trading at after a 24% gain over the past year.
Not only is Coke not a high-growth company, its earnings per share have increased by just 1.4% over the past five years, and its revenue has actually declined over a five-year timeframe . A 30 times multiple means shares of Coke are priced for perfection, but there are serious headwinds looming. Its common knowledge that sodas and sugary drinks have come under increasing scrutiny over the last few years as consumers grapple with the health effects of these products. I will give Coke credit for diversifying into healthier products like Body Armor water and Smartwater, but the fact remains that there is still a serious headwind to the company's core product.
Bond-like payout in rising-rate environment
With no meaningful revenue or earnings growth and a 2.7% dividend yield, Coke is essentially a bond trading at a valuation of 30 times. If interest rates are hiked again and bond yields go up, should Coke still trade at 30 times earnings? I will give the company credit for its dividend payout and the fact that it has increased its dividend for 59 years in a row. However, on the other hand, the payout isn't high enough to compete with bonds in a rising rate environment, and it pales in comparison to the higher payouts offered by many other equities in the consumer packaged goods space and beyond, such as Altria Group (NYSE:MO) and its 7% dividend yield.
What could Coke learn from Altria?
If an income investor wants to invest in a slow-growth (or no-growth) company for its dividend payout, they may be better served looking at something like Altria. Like Coca Cola, Altria trades at a high P/E multiple despite exhibiting negligible revenue growth over the last five years. But Altria pays out a dividend that yields 7% at current prices, even after shares had a huge run from December to January. Altria is also returning capital to shareholders by actively buying back shares, which is something Coke is not doing at the moment.
Coca Cola is a great company that has created tremendous value for shareholders for many decades. However, based on its current valuation and stagnant growth, it does not look like a buy right now. Even for income investors, there are many more attractive options out there paying out much higher yields than Coke's 2.74%. For retirees who are OK with the dividend payout as part of a broader income portfolio or someone who has held Coke for a long time and is sitting on some large gains, I wouldn't say Coke needs to be sold, but I would not be looking to initiate a new position at this time.