Consumer goods has been a rough industry to be in this year. Inflation pressures are easing, but it's still elevated. That's making it more challenging for consumers to make purchases cheaply and more challenging for companies to make money.
Coca-Cola (KO) managed these potential headwinds well so far. But it's becoming increasingly difficult to grow profits while production costs increase and shoppers cut spending and/or turn to cheaper alternatives.
As this economic story continues to play out, where will Coca-Cola (and its stock) be a year from now?
Coca-Cola is strengthening its core brands
What doesn't break you tends to make you stronger, and Coca-Cola got a whole lot stronger after initially posting massive sales declines early in the pandemic. As part of its response to the situation, it restructured into new marketing segments and slashed its brand portfolio by half, dropping 200 of its roughly 400 brands. It also introduced new, smaller-sized products and leaned into digital to bolster sales. Now that business has bounced back, it's in a much better place than it was before the pandemic hit.
The brand tactic was extreme, but it resulted in much greater efficiencies. Coca-Cola's core brands are its bread and butter, and it now has more resources to devote to the brands that generate the most sales. Customers are loyal to these beloved brands, and the company was able to raise prices without alienating many customers. Part of that is also coming from innovative packaging; for example, smaller cans were a hit. Shoppers might be cutting spending on beverages, so they're willing to shell out money for their favorite drink at a lower price, even if they're getting less overall.
Right now, management is working to improve its most-loved brands through brand makeovers, whether a fresh look or more targeted marketing, along with better distribution. CEO James Quincy summed up management's job as "ensuring we have the right product in the right package in the right channel at the right price point." Coke rigorously works to get each of those factors right.
In a year from now, expect your favorite Coke brands to be the same, but with a fresher feel and probably a more digital experience. These "soft" innovations are the typical tools a large and well-run company uses to stay relevant and increase engagement. Coca-Cola is also constantly experimenting with new brands that could become the next beloved core brands.
Management confirmed that it's committed to generating top-line growth and maintaining profitability, and it's guiding for high-single-digit organic growth in the second quarter.
This can't go on forever, but neither can inflation
So far, Coca-Cola has managed well through inflation due to these targeted moves and price hikes. But it's getting harder. Sales increased 5% year over year in the 2023 first quarter, while organic revenue, or sales from existing brands, increased 12%. Earnings per share (EPS) rose 12%, but operating income declined 1%. The balance sheet is healthy, with $12 billion in cash.
Management said that the inflationary impact is beginning to ease, putting less pressure on the company to take more pricing actions to sustain profits. There are likely to be continued near-term challenges, but Coca-Cola is well-positioned to manage effectively until they pass.
Believe it or not, Coca-Cola still sees a huge growth runway. Its addressable market has increased from $650 billion in 2019 to $1.3 trillion as of last year, and its trailing 12-month revenue of $44 billion is only a small piece of that pie.
The markets for its various segments are expected to grow at a compound annual growth rate of mid-to-high single digits, giving it plenty of organic growth so long as it sticks to its tried-and-true formula. That's without new innovation or greater market share.
The all-important dividend
Coca-Coca is a classic Dividend King. It's completely committed to its dividend and raised it annually for more than 60 consecutive years. It uses its large stockpile of cash to fund the dividend under any circumstances, and it's one of the most reliable dividend stocks money can buy. At the current price, Coca-Cola's dividend yields 3%, which is just about where it usually falls out. That's not likely to change much in the near future.
One year from now, Coca-Cola is likely to be demonstrating continued growth and generating large amounts of cash. As inflation cools off, some of the pressure on its profits should ease. It will also be paying its attractive dividend, which is a dependable source of passive income, and shareholders can count on that for years into the future.
