The broader market is holding onto most of its gains so far in 2023 -- up about 17% year to date. But the S&P 500 is merely an index of 500 stocks, which means that returns of individual companies will vary across the board with some gaining more and some gaining less or even losing value.
Beverage giant Coca-Cola (KO 0.26%) falls into that last category, trailing the S&P 500 with a 6% loss for the year, and that's despite delivering lots of good news for investors. Let's see why the stock is down, and whether or not this presents an opportunity for investors.
No competition for this giant
Coca-Cola is the largest beverage company in the world and it's still growing. Despite its size, it regularly generates sales increases, and it delivers strong profits.
Sales began to slow down in the years leading up to the pandemic, but the company restructured over the past few years and shed its low-performing brands. It rebounded from pandemic declines as a leaner, more efficient company, with higher sales increases.
It has been able to absorb much of the impact of inflation and higher costs by raising prices, but that can't go on forever, and it's finally starting to feel the effects of inflation. Revenue increased 6% year over year to $12 billion in the 2023 second quarter, and earnings per share (EPS) grew 34% to $0.59. However, its operating margin narrowed from 20.9% to 20.7%.
Some of the ways it's stimulating growth include offering new types of products and packaging, such as mini drinks that cost less and allow customers to consume beloved beverages at lower price points. Through these kinds of actions, Coca-Cola is gaining market share in its core category of non-alcoholic, ready-to-drink beverages despite the tough environment.
The growth story isn't over
As long as high inflation persists, Coca-Cola won't be able to keep up its high profitability. But this should be a short-term challenge, and it's an external headwind that most of its peers are experiencing as well.
The company still sees a long growth runway in capturing market share, especially in developing markets, as well as organic growth within its categories. Its addressable market expanded from $650 million in 2017 to $1.3 trillion in 2022, and all of its categories are growing at a compound annual rate of 4% to 10%.
Management is guiding for organic growth of 8% to 9% in 2023, with comparable EPS growth of 5% to 6%, and $9.5 billion in free cash flow.
King of dividend kings
Coca-Cola is known as a classic dividend king, a category of stocks that have raised their dividends for at least 50 years consecutively. In fact, Coca-Cola has raised its dividend annually for the past 61 years. It's about as rock-solid as you can get for a dividend stock, and continued to pay the dividend throughout the pandemic despite massive sales declines and a payout ratio that reached over 100%.
The stock also sports a solid 3.15% yield -- about twice that of the S&P 500. The share price typically moves in a way that the dividend stays around 3%. And that payout is quite safe. Coca-Cola is a cash-generation machine, increasing cash flows from operations by $83 million year over year to $4.6 billion in the second quarter. Shareholders can have confidence that Coca-Cola will pay its dividend for decades.
Reliable, but not necessarily a market-beater
Coca-Cola stock outpaced the S&P 500 last year, gaining 7% while the market tanked almost 20%. As the company's performance stabilizes and investors are drawn again to tech shares, some may not be as enthusiastic about more steady stocks. Coca-Cola has gone through phases where it beat the market, but it hasn't done so consistently in about 30 years.
However, this doesn't mean investors should sell. Coca-Cola continues to demonstrate solid thinking and make innovative decisions to capture market share, and that could drive growth for decades. For those seeking passive income, Coca-Cola is a superstar. Therefore, investors looking for reliability and security should consider buying Coca-Cola stock.
