One place investors will sometimes look for bargains is among underperforming stocks. More often than not, though, these businesses have weak returns for good reasons, which sometimes include declining market share and falling profits. This investing strategy clearly has issues.
The underperforming stocks approach has a better chance of working if you limit your search to members of the Dow Jones Industrial Average. These 30 stocks are among the most established businesses on the market, which gives them a much better chance of bouncing back from that underperformance. And because dividend yields rise in relation to falling stock prices, underperforming Dow stocks also tend to pay higher yields than their peers. Among veteran investors, this popular stock-buying strategy is referred to as buying the "Dogs of the Dow."
Coca-Cola's (KO 0.26%) 16% decline so far in 2023 puts it in the running to be one of these "dogs," as it is currently the fifth-worst-performing stock on the Dow. Does that discount make it a compelling buy today? I believe it does. Here are a few good reasons to like this laggard right now.
Coca-Cola's growth looks good
Coke will update investors on its Q3 operating performance on Oct. 24, but until then, shareholders have positive metrics to rely on about its growth trends. Organic sales were up a solid 11% in the Q2 period that ran through late June. Coke won market share with its core brands like Coke Zero, but also through sales of nontraditional beverages like waters, coffees, and sports drinks.
The weak point in that Q2 report was sales volume, which was flat through early summer. Ideally, Coke can achieve a better balance between rising prices and higher volumes in the second half of 2023. Yet the company proved that it has pricing power and that it can steadily win market share in its competitive industry. Management raised its 2023 outlook and now expects sales to rise by between 8% and 9% this year, on top of a blazing 16% in 2022. Look for another potentially bright forecast in the late October announcement.
Coca-Cola's yield is impressive right now
Yield is one of the best reasons to consider those Dow underperformers, and Coke excels in this regard. Its 3.4% yield is among the highest percentages it's been at in the past decade and well above its 2.95% average. Among Dow components, it's the eighth highest-yielding stock on the index right now. A $15,000 investment would deliver roughly $510 in annual income that investors could choose to automatically reinvest so they could acquire more shares with each passing quarter.
KO Dividend Yield data by YCharts.
There's a bright outlook for that payout, too. Coke's profits and cash flow are strong, and most Wall Street pros expect earnings to rise to $2.64 per share in 2023 from $2.48 per share last year. The dividend has been raised annually for 60 consecutive years, giving investors confidence that the payout can keep increasing through a wide range of selling conditions.
Coca-Cola's stock trades at a discount ... for the moment
Like any consumer-facing business, Coke would be impacted by slowing consumer spending or any approaching recession. However, investors are getting an attractive discount on the stock that more than accounts for these short-term risks.
Shares trade at 22 times earnings and 5.2 times sales today. Both these valuation metrics are near their lows for the year, despite Coke's positive sales and earnings momentum through mid-2023. Sure, there will likely be more volatility ahead. But this Dow laggard will almost surely be setting operating records in a few years. Income investors will likely be glad they had Coke stock in their portfolio in the meantime.
