Coca-Cola (KO -0.72%) has long attracted investor interest, with Warren Buffett becoming one of the more notable shareholders. He acquired stock between 1988 and 1994, eventually taking Berkshire Hathaway's stake to 400 million shares. As a result, he owns more than 9% of all outstanding shares.

The fact that he maintains this holding and collects a growing dividend makes the beverage stock worthy of further investigation. Competitive advantages, valuation, and dividends can change over time, meaning now may or may not be a good time to buy. Let's explore.

Evaluating Coca-Cola today

Coca-Cola has traded on the exchanges for more than 100 years, and the Dividend King has increased its payout for 60 years. Long a global company, it has steadily acquired other beverage brands to expand its base. Today, over 200 brands and several thousand beverages fall under the Coca-Cola umbrella.

Still, the world economy remains sluggish, indicating that sales growth could slow. Moreover, approximately 65% of its revenue comes from outside North America. Amid the strong dollar, consumer purchasing power has fallen abroad, a factor that could hurt sales.

Nonetheless, sales levels have at least experienced a reprieve. In the first half of 2022, Coca-Cola reported almost $22 billion in revenue, rising 14% compared with the same time frame in 2021. Unfortunately for the company, the cost of goods sold surged 22% during the same period. This led to $4.7 billion in income for the first half of 2022, 4% less than the year-ago period.

Analysts still project 7% earnings growth this year and 5% in 2023. But investors have sold off the stock recently, and it has significantly underperformed the S&P 500.  

Dividends and valuation

Admittedly, the dividend picture will look much different for Buffett than for new investors, since he has benefited from 34 years of dividend growth. Even though he has made no changes to his position since 1994, he will earn $704 million in payouts this year, a 54% dividend return on his $1.3 billion investment.

Investors who buy today will earn $1.76 per share this year in payouts. This amounts to a return of around 3.1% at today's share prices. Still, the current free cash flow of almost $4.1 billion so far this year dropped 20% from the same time frame in 2021. For this reason, it barely covers the $3.8 billion in dividend costs.

Since it holds $9 billion in cash, the Dividend King status is not likely in danger. Nonetheless, the 3.1% yield is well above the S&P 500 average of 1.75%. This indicates the next payout hike is unlikely to exceed the 5% rate this year.

Moreover, the stock's P/E ratio stands at about 26. While that does not come in significantly higher than the earnings multiples for PepsiCo or Keurig Dr Pepper, income investors will like that its dividend yield surpasses these peers.

KO Dividend Yield Chart

KO Dividend Yield data by YCharts

However, that dividend yield is far from a record. Hence, the cash yield that investors may want to target on this Warren Buffett favorite is 3.5%. Historically, it reached that point during the 2008-09 financial crisis and the COVID-19 crash in early 2020. Also, Buffett himself began investing in Coca-Cola soon after the 1987 stock market crash, and emulating this Buffett strategy could turn into a wise decision.

Stand pat on Coca-Cola stock

Coca-Cola's stock has become a dividend juggernaut for Warren Buffett, and admittedly, that slow, steady growth should continue to benefit both new and longtime investors.

However, a strong dollar and a struggling economy have strained the stock price. With the strong dollar likely to dampen overall sales in the near term, investors should consider either holding out for the 3.5% yield or looking for other income opportunities.