Coca-Cola (KO) is one of the quintessential blue-chip stocks. You'd be hard-pressed to find another product of any type that compares to the brand recognition of its flagship soda, and it's paid off for the company through the years.
Its stock is down around 4% this year, partly due to investors flocking toward tech and beaten-down growth stocks that have rallied in 2023. Despite lagging stock performance this year, Coca-Cola is positioned to be a great long-term investment.
Money is rolling in despite the economy
In the first quarter, Coca-Cola made $11 billion in revenue, up 5% year over year. Its net income grew at a faster pace, increasing 11% year over year to $3.11 billion. Given the broader economy, the growth is impressive. With net income growth outpacing revenue growth, it's a sign that the beverage giant is operating more efficiently, even with its operating margins down year over year.
Data by YCharts.
A large part of why its financials have thrived despite the economy is its pricing power. When inflation hits high levels, some companies have to eat higher costs to keep their prices consistent and remain competitive. Other companies can pass the higher costs on to consumers without worrying they'll switch to another product. Luckily, Coca-Cola is part of the latter group.
There are still growth opportunities
Despite having distribution in over 200 countries, Coca-Cola still has plenty of growth opportunities as new categories enter the market and consumer preferences change accordingly. The company's total addressable market (TAM) was around $650 billion in 2017; by 2022, its TAM had jumped to around $1.3 trillion.
Here are the expected yearly growth rates for beverage industry categories from 2023 to 2026:
- Sparkling soft drinks: 4% to 5%.
- Juice, value-added dairy & plant-based beverages: 4% to 5%.
- Water, sports drinks, coffee, and tea: 5% to 6%.
- Energy drinks: 7% to 9%.
- Hot beverages: 5% to 6%.
- Emerging markets: 10%.
As the global leader in the beverage industry, there's no reason to believe Coca-Cola won't be able to grow its respective categories at those rates, at minimum -- especially since it's shown a commitment to embracing categories outside its flagship sodas. Management plans to reinvest around $1.9 billion of its cash from operations in 2023 back into the business to focus on expansion.
You don't think of a company that's been around for over 130 years as having the growth opportunities that Coca-Cola has, but the company is in a unique position. The beverage category is naturally expanding as different categories get introduced.
Even getting back into alcohol (after taking 35 years off) with its ready-to-drink segment is a sign that Coca-Cola won't get comfortable and complacent.
A dividend you can count on
For investors, having a margin of safety is important. In most cases, it's the difference between a stock's intrinsic value and its trading price. In other cases, it's a guaranteed, above-average dividend. Coca-Cola's quarterly dividend is $0.46, with a trailing-12-month yield of around 3%. That's almost double the S&P 500's current yield.
Not only does Coca-Cola pay an above-average dividend, it also has raised its payout for 61 consecutive years, making it a Dividend King. This isn't likely to change, either. In 2022, the company paid out $7.6 billion in dividends, comfortably less than its $9.5 billion in free cash flow. This year's free cash flow is projected to be about the same, so investors have nothing to worry about on this score.
Regardless of Coca-Cola's stock price performance, investors can be confident they'll be rewarded quarterly via dividends. The stock price increase versus total returns over the past 10 years shows the important role dividends play.
Data by YCharts.
There's no need to overcomplicate it
Sometimes an investing decision comes down to one simple question: Is this a stock I'll feel comfortable buying and holding onto for decades? In Coca-Cola's case, the answer seems to be an overwhelming yes. The stock isn't necessarily cheap, with a price-to-earnings ratio of 26.6, but that's along the lines of the S&P 500's average of 26.1.
Over the long term, there are few companies you can be as confident in to return value as you can with Coca-Cola.
