With the S&P 500 down by more than 23% this year, it's tempting to dive in and buy stocks indiscriminately. While the sharp sell-off makes it an opportune time to examine companies' long-term prospects, you should exercise care in determining an equity's value.
Two well-known names, Coca-Cola (KO) and Walt Disney (DIS -0.04%), down by 6% and 37% since the start of 2022, respectively, warrant closer examination.
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Coca-Cola
Coca-Cola owns some of the most popular soft drinks sold throughout the world. In fact, it sells five out of the six best-selling brands (Coca-Cola, Sprite, Fanta, Diet Coke, and Coca-Cola Zero Sugar).
While the early days of the pandemic hurt its away-from-home business due to shutdowns (e.g., stadiums and restaurants), Coca-Cola's sales have come roaring back, proving the brand's enduring popularity. In the second quarter, adjusted sales, when excluding foreign currency exchange translations and acquisitions, grew by 16% to $11.3 billion. Importantly, management reported that the company gained market share.
Coca-Cola's results can be affected by the economic cycle, since it historically generates about half of its sales from the away-from-home channel. However, people shopping for Coca-Cola drinks at home aren't likely to reduce their purchases.
As a testament to the strong underlying business, it has built an incredible track record of raising dividends, having done so for 60 straight years. That makes the stock a Dividend King. The Oracle of Omaha, Warren Buffett, has done well by collecting dividends through the years.
And Coca-Cola has the free cash flow (FCF) to support ongoing payments. For the first half of 2022, its FCF was $4.1 billion, giving it a cushion to pay the $3.8 billion of dividends.
A popular brand that continues to gain steam along with a dividend that steadily grows make for a powerful combination.
Walt Disney
The House of Mouse has become a sprawling media empire that includes theme parks; television networks like ABC, the Disney Channel, and ESPN; streaming services like Disney+; and studios such as Disney and Fox.
It's also rebounded nicely from the pandemic shutdowns in 2020, which particularly hurt its theme parks and live sports results. In the fiscal third quarter (ended July 2), Disney's revenue increased by 26% to $21.5 billion.
While other streaming services, such as Netflix, have struggled with subscriber growth, Disney+ continues to add new ones. In the last quarter, the streaming service ended with 152.1 million subscribers, up 31% from a year ago. Hence, while certain operations may see results dented by an economic slowdown, other businesses like Disney+ and movies should do well as people stay home and seek cheaper entertainment.
All that said, with the uncertainty created by the pandemic, Disney decided to suspend dividends in 2020, and the board of directors hasn't reinstated the payments yet.
That gives Coca-Cola a leg up over Disney. You can rely on the former to continue making regular payments, and the stock has a 3.1% dividend yield. It's nice knowing that Coca-Cola has a strong commitment to rewarding shareholders through various economic environments. While both have strong, venerable businesses, I give Coca-Cola the edge.
