Coca-Cola (KO 0.26%) shareholders haven't enjoyed sparkling returns lately. The stock rose less than 30% in the five years ended in mid-September, trailing the 53% boost in the S&P 500 over that time. The picture doesn't improve much when you include dividend payments, either. Coke's total return in the past five years has been roughly 47% compared to the broader market's 67%.
There's no way to know for sure whether the beverage giant will continue trailing the market in the years to come. But there are some good reasons to expect better returns from here. Let's take a closer look.
1. Growing sales
Wall Street is concerned about Coke's flat sales volumes right now, but look closer and you'll see no sign of weakness in this stellar business. Organic sales jumped 11% in the most recent quarter as the company showed off its pricing power by passing along higher costs. Coke benefited from consumers' rising demand for newer brands and more convenient packaging options, too.
The company is finding success with its core drink franchises like Coke Zero, but also with rising demand for non-traditional brands, including Powerade, Gold Peak, and Smartwater. Market-share wins in recent quarters show how Coke can continue boosting its dominant industry position over the next five years. It is highly like that by 2028 it will account for more than the current 2.2 billion servings of beverages consumed around the world every day .
2. Highly profitable
Annual earnings growth should also get a boost from Coke's improving profitability over the next few years. While peers are struggling to keep margins steady, Coke's non-GAAP profit margin rose last quarter to 32% of sales from 31% of sales. This boost came courtesy of the combination of several valuable tailwinds. These include higher prices, cost cuts, and more demand for innovative products like energy drinks.
Management is targeting more progress ahead for 2024 and beyond as the company benefits from strategic price increases and rising demand for on-the-go beverages. "We are executing efficiently and effectively on a local level while maintaining flexibility on a global level," CEO James Quincey said in late July.
3. More dividend hikes
The most predictable portion of shareholders' rising returns in the next few years is Coke's dividend. That payout has increased in each of the last 60 years, after all, including a 5% hike in early 2023.
Supporting this growth is Coke's rising net income, which jumped 33% last quarter. Investors can look at the company's ample cash flow for further signs that the dividend will keep growing at a solid clip over the next several years.
The stock's path
Coke's valuation is sitting at less than 6 times annual sales today, putting it roughly in the middle of the extremes that investors have seen over the past few years. You could purchase the beverage giant for about 4.3 times sales during the worst days of the pandemic market slump, and shares were trading at over 7 times sales at several points during the subsequent rally.
It's a good sign for future returns that Coke's valuation and its earnings power are moving in opposite directions right now. Shares are trading for 24 times earnings today, down from nearly 30 at the start of the year.
Assuming the company continues its positive operating momentum, then it will just be a matter of time before Wall Street rewards the stock with a higher valuation. In the meantime, shareholders can collect that rising dividend check as they wait for Coke's stock to begin reflecting the company's operating wins.
