Coca-Cola (KO 0.25%) stock is a great example of a classic Dividend King. It has raised its dividend for 61 years, and the dividend usually yields around 3%, or close to double the average S&P 500 yield. The juicy payout, growth, and reliability help it stand out in a sea of stocks.
But you'd have to go back many years -- more than 30 -- to the last time this Buffett favorite was a market-beating stock, dividends included. Is it still a worthwhile investment? Or can you make your money work harder for you elsewhere?
Is Coca-Cola stock a winner or a loser?
First, let's define what it means to be underperforming the market. To be clear, Coca-Cola stock has been a net gainer over many years, and investors have not lost money investing in Coca-Cola stock unless they quickly bought and sold at the wrong time. Coca-Cola stock is down 5% this year, but it's up 27% over the past three years and 56% over the past 10 years. That's still a gain, but it's well below what you would have gotten if you'd invested in the market. Even when you add in Coca-Cola's esteemed dividend, you'd have gotten much more money investing in the S&P 500.
This trend has continued for several decades. So, while you technically would not have lost any money investing in Coca-Cola stock, you would have been far from maximizing your investment.
What looks troubling is that the wide divergence happened recently. Coca-Cola stock more or less mirrored the broader market's gains for many years, but sales growth began to look sluggish toward the pandemic.
What about Coca-Cola stock's chances going forward?
Coca-Cola made some major changes over the past few years to become a leaner and more agile company. It slashed its brands by about half, from 400 to 200, to cut out labels that were drawing resources away from core brands without delivering the same value. It also restructured operations to better manage its huge, global enterprise.
This has resulted in a strong performance that's been better than pre-pandemic results. Currently, sales and profits have been pressured due to macroeconomic concerns that are affecting most consumer goods companies. In the 2023 second quarter, net revenue increased 6% over last year, although organic revenue, or revenue from existing brands, was up 11%. Comparable earnings per share were up 11% to $0.78.
Management still sees plenty of growth opportunities as the industry grows by a compound annual growth rate of around 6%. It has a small percentage of market share in its various markets, and in its newest form, it's well- positioned to capture more.
Why is Buffett a believer?
Coca-Cola is one of Warren Buffett's largest positions, accounting for 6.8% of the Berkshire Hathaway portfolio. In many ways, Coca-Cola is the ideal Buffett stock. Buffett has said that he would never sell Coca-Cola stock. He loves the strong brand, which is unbeatable, and he sees that as its ticket to continued participation in a growing economy.
He has also praised its dividend. Buffett loves dividend stocks because they provide income regardless of what happens to the stock price but also because they demonstrate a company's commitment to its shareholders. Berkshire Hathaway owns 400 million shares of Coca-Cola stock, or 9.2% of the total shares, purchased for $1.3 billion from 1988 through 1994. In 2022 alone, the dividend it received from those purchases was $704 million.
Should you be a believer?
Here's the thing to keep in mind about following Buffett into some of his positions. The dividend is very important to Berkshire Hathaway because it is a holding company, and it uses its dividends for various company purposes, like buying more stocks. That's an important piece for Buffett that doesn't apply to most individual portfolios.
But that doesn't mean you shouldn't buy Coca-Cola stock. As Buffett says, it's a strong brand that will be around in a dominant position for the foreseeable future. It's improving its business and demonstrating progress. The dividend pays a great yield and is as reliable as they come.
We don't know how the stock will stack up next to the market, but we do know the company is likely to stick around as the largest beverage company in the world and pay a rock-solid dividend. These attributes could be very valuable as part of a diversified portfolio.
