Coca-Cola's (KO) strengths as an investment are the stuff of legend. It dominates the global market for on-the-go drinks with several billion servings of its products sold each day.
That industry position confers some impressive financial metrics on the business, including high profit margins and ample cash flows. It also allows for steadily growing earnings through a wide range of selling environments.
Coca-Cola is an excellent income investment, too, having boosted its payout in each of the last 60 years. It's no wonder that this stock is one of Warren Buffett's favorite holdings.
But these assets are well known on Wall Street, potentially limiting an investor's returns from here. With that central risk in mind, let's take a fresh look at whether the stock is a good buy right now.
The case for waiting
The stock has trailed the market by a wide margin in 2023, with shares down 12%, making it one of the worst performers on the Dow Jones Industrial Average to date. It might be tempting to wave away that performance as just a consequence of Wall Street's shortsightedness, but it also reflects some potential issues with the business.
The biggest one is growth. Coke just posted a robust 11% organic sales boost for the second quarter, but all of these gains came from rising prices. Volumes were flat in the quarter as consumers pulled back on their spending.
The main worry on Wall Street is that this negative trend will continue or potentially accelerate into late 2023 and early 2024. Investors would much rather see a balance between rising prices and increased sales volumes; there's a limit to how far you can raise prices without hurting demand.
The case for buying
Coke isn't alone in this challenge, though. Most consumer-facing businesses, including other Dow staples Home Depot and Procter & Gamble, are seeing reduced sales volumes right now. Within the beverage industry, rival PepsiCo posted a 5% volume decline last quarter, offset by much higher average prices. Coke's performance looks better in that context.
And its finances remain sparkling. The operating profit margin is close to 30% of sales compared to Pepsi's 13%. It generated over $4 billion of free cash flow in the first half of 2023, giving management plenty of resources it can direct toward growth initiatives and that growing dividend payment. Don't forget that buying the stock today delivers a more than 3% yield that will likely pad returns even in a down market.
The price is right
Ultimately, Coke stock will appeal to most investors today. While you aren't likely to see growth rates approaching the 15% spike that the company enjoyed in 2022, Coke is positioned well for steady sales gains as it keeps winning market share in the expanding beverage industry. The consumer staples giant's industry-leading earnings and profits will keep those direct cash returns rising and will give the company what it can use to further widen its competitive moat.
These factors should support solid long-term returns, especially given the stock's discounted valuation. You can own Coke stock for 5.4 times annual sales, which is its lowest price since the start of the pandemic. Shares look attractive at that price, even considering the prospect for rocky growth results over the next few quarters.
