Coca-Cola (KO 1.10%) is a good income stock to own, but on the growth front, the company has been fighting a tough battle for years as consumer tastes shift gradually toward healthier drink options. For its part, the company has adapted and evolved its portfolio. Its Diet Coke and Coke Zero products have been major contributors to its top-line growth. But demand for them could soon take a hit.
According to reports, the International Agency for Research on Cancer (IARC), which is part of the World Health Organization, is going to formally declare aspartame a possible carcinogen this month. Both Diet Coke and Coke Zero contain aspartame. Having a key ingredient in some of its top-selling beverages linked to cancer -- even potentially -- is obviously not going to be good for Coca-Cola's business.
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The challenge for soda companies such as Coca-Cola and rival PepsiCo will be determining how best to respond to this news. There's been much debate over the years as to which artificial sweeteners are safe and whether they do more harm than good. There have been conflicting studies as to their safety.
Coca-Cola is in a difficult situation. Continuing to use aspartame in its low-calorie beverages would mean keeping a possible carcinogen in its products, assuming the IARC acts as expected. It could switch to another artificial sweetener, but there's no guarantee that researchers won't eventually determine that replacement to also be a potential (or definite) health hazard. And if it opts to switch sweeteners, the company will have to spend time and money developing new recipes that match (or improve upon) its beverages' current flavor profiles.
The complexities of cancer-causing categorization
The IARC has multiple categories of carcinogenic agents. In Group 1 are agents such as asbestos and tobacco, for which there is convincing evidence that they cause cancer in people. Group 2A contains substances that are probably carcinogenic. For an agent in that classification, there is less research evidence in humans than for those in Group 1, but also other types of research that indicate that it likely can cause cancer (e.g., it is carcinogenic in animals, or a "positive association has been observed between exposure to the agent and cancer"). For those in Group 2B, explains the IARC, only one category of evidence currently exists: "limited evidence of carcinogenicity in humans; sufficient evidence of carcinogenicity in experimental animals, [or] strong mechanistic evidence, showing that the agent exhibits key characteristics of human carcinogens."
This last one, then, is the "possibly carcinogenic" group -- and the one aspartame would presumably be assigned to, for now. There are more than 300 agents in this category today, compared to 120-plus cancer-causing agents that the IARC has placed in Group 1 and 90-plus agents in Group 2A.
In short, researchers have not gathered sufficient evidence to show that aspartame definitely causes cancer. But classifying it in Group 2B could still give many consumers pause, especially those who are unfamiliar with the details of the IARC's classification system. The danger for Coca-Cola is that it could lead to a drop in sales for its key products. Last year, the company reported that Coca-Cola Zero Sugar product sales rose by 11%.
In 2021, CEO James Quincey predicted that Coke Zero Sugar would be the company's biggest growth driver for the next few years. Whether that sales growth continues is now more of a question mark.
Does this make Coca-Cola a worse stock to buy?
Aspartame being placed in the IARC's "possible carcinogen" category could cause some headaches for Coca-Cola. Changing sweeteners may be a short-term fix, but many other sweeteners have been experiencing bad press of their own lately.
Nor is it clear how consumers broadly will react to a new and nuanced health warning from the scientific community. That makes it hard to predict just how much of an impact this may have on Coca-Cola's business, either in the short or the long term.
At this point, investors can only wait and see how consumers respond. For income investors, Coca-Cola is a Dividend King, and with a yield of 3% at the current share price, it remains an excellent income investment. But given that it's trading at 27 times earnings, growth-oriented investors may not want to rush out and buy it.
