Coca-Cola (KO +0.77%) not only produces one of planet Earth's favorite beverages, but its stock has been prized by investors for years -- particularly those who love its ever-growing dividend.
But today's bear market has claws that are sharp and cutting, and even beloved Coca-Cola is looking rather scratched these days. The company's stock is down by more than 8% year to date. Let's take a closer look at why -- and, more importantly, whether this represents a good buying opportunity.
The market keeps losing its fizz
We should first consider this in context. Yes, Coca-Cola's recent share price decline is teasing double-digit percentages, but the stock has done better than many titles on the exchange. Compared to the nearly 24% swoon of the benchmark S&P 500 index, to cite a prominent example, it's almost a raging success story.
NYSE: KO
Key Data Points
We can attribute Coca-Cola's slump to the generally sour investor sentiment that grew through the summer. The war in Ukraine, persistent inflation, and supply chain hiccups throughout various economic sectors made people nervous. And when they're nervous, they tend to trade out of stocks. Blue chips like Coca-Cola are always on the firing line, no matter how good their recent fundamentals might be.
And this company's numbers have been impressive. With nearly $40 billion in annual revenue, Coca-Cola is nearly an economy unto itself, and its power as a beverage sector alpha is unmatched. As a result, it can boost prices to offset higher costs. Flipping that switch in the second quarter this year kept the company's operating margin largely unchanged from the same period one year ago.
The restaurant industry is recovering from the crippling period that was the thick of the coronavirus pandemic. Busier restaurants mean more sales of Coke and other syrups from the company. (Think about it: Have you been to an American eatery that doesn't serve Coke and its maker's other sodas?)
The restaurant industry is a key demographic for the company, and it's helping to power its growth. With this tailwind behind it, Coca-Cola recorded year-over-year gains in both revenue and non-GAAP (adjusted) net profit during the quarter.
Quality at a discount
Coca-Cola's core products are fairly simple -- its signature beverage is almost entirely sugar and water -- that require almost no innovation.
That Diet Sprite you bought today at the grocery store cost the company only pennies to make. This is a key reason why the company's annual profit margins have regularly topped 20% these days -- and also why it typically betters those of rival PepsiCo, which is less a soft drink pure play due to its big portfolio of snack foods.
So Coca-Cola doesn't have to spend much on research and development, although it does devote monies to coming up with new flavors for much of the market to ignore.
The benefit of this is that the company has billions of dollars for all-important marketing and advertising, with plenty of cash flowing through its coffers on a constant basis. That's why free cash flow) is so persistently high -- last year, for example, it topped the hard-to-conceive level of $11 billion.
This continuously provides the company with more than enough money to keep raising its dividend, to the point where it's now a Dividend King (i.e., one of the few S&P 500 index stocks that has done so at least once annually for a minimum of 50 years). Dividends in 2021 cost the company just under $7.3 billion, so keeping that payout on the rise in the future is eminently achievable.
Even though the company is fundamentally very sound, for many shareholders it's the dividend that keeps them hanging on (and likely has been a big element in its relatively decent stock performance this year). It's currently yielding more than 3.2%, which is well above the average of dividend-paying stocks in the S&P 500, and eclipses the rate of many fellow blue chips.
So with Coca-Cola, you've got a depressed share price combined with solid, growing fundamentals, and a generous dividend that will continue to increase. That sounds like a wise investment to me.
