Coca-Cola (KO 2.14%) stock has been attracting investors lately, with shares rising just over 8% in 2022 compared to a 17% slump in the S&P 500. Wall Street sees the beverage giant as a great investment, in part because sales are rebounding sharply after slumping in earlier phases of the pandemic.
Coke's pricing power and dividend payment also make it a sensible option for investors seeking stable returns.That was clear in the company's latest earnings report, which mainly showed improving sales trends and steady profitability despite soaring costs. Let's dive right in.
Sales are bubbly
Investors had high expectations heading into second-quarter results, which were announced July 26. Coke revealed a 16% hike in organic sales in the prior quarter, after all, and rival PepsiCo (PEP 1.08%) recently announced solid sales gains for its beverage business.
Coke didn't disappoint. Sales jumped 16% in the selling period that ran through early July, and the gains came from a balance of rising volumes and higher prices. "Our results," CEO James Quincey said in a press release, "reflect the agility of our business."
Yes, sales growth is slowing in the key North American market. Coke's U.S. geography posted just a 2% volume increase as prices jumped 10%. For context, volumes rose 6% in Europe and 9% in Latin America. But it was still good news for the business that Coke could achieve increased volumes in each of its geographies even as it passed along much higher prices.
Profitability updates
Coke wasn't immune to the cost pressures that are impacting most businesses. But its dominant market-share position helped it nearly offset all those challenges.
The combination of higher prices and a demand tilt toward premium products allowed its adjusted operating margin to land at 31% of sales, down just slightly from the prior year's 32% mark. After adjusting for currency exchange rate shifts and the suspension of its Russia business, Coke's profit rose 15% compared to the 16% increase in organic revenue. That success helped the company stand out against other dividend giants like Walmart, which recently lowered its earnings outlook.
A better outlook
Coke's stock looks even more attractive after management said it still expects to boost earnings this year at a double-digit rate. Inflation and currency swings are taking a bigger bite out of profits, but the business is still generating higher earnings and robust cash flow. Coke raised its earnings outlook and now sees profits rising between 14% and 15% compared to the prior range of 8% to 10%.
The company also raised its sales forecast and is targeting organic revenue gains of between 12% and 13%, marking a big upgrade from the prior range of 7% to 8%.
These new targets illustrate why Coke is in such a great position today as it benefits from increased consumer spending and higher prices. The company's expected $11 billion of free cash flow, meanwhile, should support a big dividend hike in 2023. That's just another reason to like this dividend stock in 2022.
