Coca-Cola (KO 0.26%) has been selling beverages for more than 150 years. Clearly, the company has done quite a bit right to survive and flourish for that long.
But the world constantly changes and new competitors crop up all the time. Can Coca-Cola keep up, rewarding shareholders with market-beating returns? Let's take a closer look at the fundamentals to see if the stock warrants buying, holding, or selling.
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More than soda
Most people know Coca-Cola for its soda products. Indeed, it sells five out of the world's six best-selling soft drink brands. But the company's products also include water, sports drinks, tea, juice, and plant-based beverages.
Its second-quarter unit case volume was flat across its three product groups (soft drinks, juice/dairy/plant-based, and water, sports, coffee/tea) compared to a year ago. In the first quarter, volume grew by 3%.
Coca-Cola was able to raise prices, though, and pricing power fueled the second quarter's 11% increase in adjusted revenue. A diverse product selection should help Coca-Cola's results over the long run as people turn to healthier alternatives, however. And the company did gain market share in the nonalcoholic ready-to-drink beverage market.
Returning cash
Coca-Cola's business generates a prodigious amount of free cash flow (FCF). And the company uses a good chunk of that FCF to reward shareholders.
In the first half of the year, its FCF was $4 billion. The company spent over half, $2.1 billion, on shareholder dividends.
The company prioritizes dividends, raising them for 61 straight years. That includes an increase in the quarterly payout from $0.44 to $0.46 per share earlier this year. Coca-Cola's stock has a 3.2% dividend yield, more than double the S&P 500's 1.5%.
Management also repurchases shares, spending $1 billion under its program this year and $1.3 billion for all of 2022. Repurchases on average have been at levels above the current share price recently.
Valuation
Coca-Cola's share price has dropped by nearly 8% since the start of 2023 compared to a better than 17% gain for the S&P 500. The stock performance has caused the price-to-earnings ratio to fall from over 28 to 24. That's lower than the market's 26 multiple.
For investors seeking dividend income, Coca-Cola is a worthy consideration. It has reliable cash flow to continue raising dividends in a variety of economic climates.
Management has driven most of the revenue growth via price increases, but that strategy has limits. After all, a company can't continuously raise prices in perpetuity.
For those seeking capital appreciation, I would sell the shares since there are better alternatives.
