Investors just aren't sure what to make of Coca-Cola's (KO) prospects as a long-term holding these days. Sure, the beverage titan dominates its industry and enjoys market-leading profit margins. Yet, consumers aren't as interested in sodas as they once were, meaning Coke's best growth days could be well behind it.
Let's take a closer look at the main bullish and bearish arguments for this popular dividend giant.
Bull: Sparkling profits
Demitri Kalogeropoulos: Coke ticks most boxes investors look for when considering a core stock holding. Qualitative factors, like a valuable brand, clear competitive advantages, and a long track record for growth, join financial metrics, like strong cash flow, profitability, and regular dividend hikes, to make it a compelling option.
It's true that Coca-Cola isn't likely to wow shareholders with growth. Even its latest 11% organic sales increase was driven entirely by higher prices while volume remained flat. But Coke can deliver fantastic returns, even if demand trends stay weak.
The company leads the industry in profitability, for example, with operating income expanding to 32% of sales in quarter two. Free cash flow was $4 billion in the first half of 2023, roughly even with the prior year's record result.
These financial wins give Coke's management plenty of resources they can direct toward supporting brands through marketing and innovation. They also make it likely that shareholders will see many more annual dividend hikes ahead as Coca-Cola targets its 61st consecutive increase in 2024.
Bear: Is the juice worth the squeeze?
Jeremy Bowman: On the surface, Coca-Cola seems like the kind of no-brainer stock that would be a good fit for almost any portfolio. It's a Dividend King, having raised its dividend every year for more than 50 years. It owns some of the most valuable brands in the world, and it's a longtime favorite of Warren Buffett, whose Berkshire Hathaway firm has held the stock longer than any other, going on 35 years now.
However, a closer look reveals Coca-Cola is no longer the juggernaut it was for much of the 20th century. Soda sales peaked in the U.S. in 2004 and have been declining even faster on a per-capita basis as health concerns have led consumers to move on to other beverages. Diet sodas haven't escaped that trend either. In fact, sales in that category, a key cash cow for the industry, have fallen even faster than regular soda.
Coca-Cola has made up for it, in part, with smaller pack sizes, higher prices, and diversifying away from its core soda business -- for example, buying the Costa Coffee chain -- but it hasn't been enough to make the stock a winner.
As you can see from the chart above, the S&P 500 has handily outperformed Coke stock on price-appreciation and total-return bases over the last decade.
Finally, consumer staples stocks like Coke are mostly thriving in the current environment as sales of groceries and other necessities have held up well, even as more cyclical stocks have suffered.
Despite that, Coke has had a forgettable year. If it can't outperform in the current environment, it seems less likely to do so when investors are confident in an economic recovery and growth stocks are back in vogue.
