As investors, we often hear about "defensive stocks" and how blue chips like Coca-Cola (KO) can help you protect your capital during a bear market. After a bull market that lasted for over a decade, this talk is no longer theoretical as Coca-Cola has proven its mettle and outperformed the broader market during the current downturn.
Here's why Coca-Cola is the ultimate defensive stock, and how it is overcoming the bear market.
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Coca-Cola is a top defensive stock
At a time when the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are all down sharply year to date, Coca-Cola just keeps shrugging off the macroeconomic doom and gloom -- rising about 2%. While this may not sound exciting, it's a lot better than the market's steep losses and is the definition of capital preservation, which is an important part of portfolio management.
Over the past 12 months, Coca-Cola's results shine even more, with a gain of some 8%. Tack on Coca-Cola's dividend yield of nearly 3%, and investors have enjoyed an even better return of nearly 11% over the past year.
Customers buy Coca-Cola's products on a habitual basis, giving it steady and predictable revenue. They may put off buying a car or a new computer in times of economic trouble, but they are less likely to cut out a product they routinely consume like Coke or Coke Zero Sugar. This notion is borne out by the results.
A home run quarter
Coca-Cola recently reported a monster third quarter. The stock handily beat Wall Street's estimates for both revenue and earnings. Furthermore, while many companies are lowering earnings and revenue guidance due to the more challenging economic environment, Coca-Cola not only stood by its guidance but went one step further -- raising its full-year organic revenue growth outlook from 12%-13% to 14%-15% and its earnings per share guidance from 5%-6% to 6%-7%.
Coca-Cola also reported organic revenue growth of 16%, which is a stellar number against the tougher economic backdrop, and also a fantastic number in general at any time for a large, mature business like Coca-Cola. The numbers look good no matter which way you slice them.
The company also reported 4% growth in unit case volume, which measures the number of units moved and negates the effect of foreign currency changes or price hikes, meaning that Coca-Cola moved 4% more units than it did the year before.
The mix of using pricing power strategically and being able to drive higher volume is a winning combination. These numbers are a testament to the strength of Coca-Cola's business and its value to consumers.
Still a nimble giant
Not only did products like Coke and Coke Zero Sugar hold up well during the quarter, but Coke's namesake beverage posted unit growth of 3% while Coke Zero Sugar stood out with a sparkling 11% increase. Coca-Cola is adapting to the economic climate and meeting customers where they are by offering them more options, such as smaller bottles or smaller multipacks with fewer cans per pack, which it calls the Coca-Cola Value Bundle.
CEO James Quincy credits the value packs for "helping to retain and recruit more customers while creating value for our customers." Quincy stated that in times of recession, many customers have historically been more concerned about the total dollar outlay on a shopping trip than on the total price per liter, making these value packs a compelling offering.
Coca-Cola is also leveraging the use of returnable bottles in certain countries to cut down on packaging costs and ensure its products are affordable for customers in these markets. Coca-Cola is a giant company with a market capitalization of over $250 billion, but under Quincy, the company is nimble enough to roll with the punches and adapt to a changing economic environment.
Contending with challenges
This isn't to say that Coca-Cola is without its challenges. The company expects costs to remain elevated throughout 2023, and a strong dollar could be a further challenge internationally as about two-thirds of Coca-Cola's revenue comes from outside the U.S. But given the masterful way that the company has navigated a very difficult 2022, investors can have a reasonable amount of confidence that Coca-Cola will manage whatever challenges 2023 throws at it as well.
Coca-Cola is an iconic brand with significant diversification both in terms of products and geographies, thanks to its worldwide operations and its extensive product lines. This is the type of investment that helps investors sleep well at night, as it has proven over the course of 2022. Not only that, but Coca-Cola is demonstrating the unit growth and pricing power to show that it can keep growing for years to come, making it a good buy for all economic environments.
