In 2023, many stocks bounced back from declines in 2022, particularly in the tech sector. But some quality companies experienced a price swoon, creating some great buy opportunities. One blue chip stock in this camp is Coca-Cola (KO), which hit a 52-week low on Oct. 6, and currently remains not far from that price.
Shares are down due to a number of factors, including the macroeconomic headwind of inflation and the perceived effect of appetite suppressant drugs. But these factors affect the stock in the short term.
Coca-Cola's performance as a company is what makes the biggest difference in the share price over the long run. Let's take a look at where Coca-Cola is today, and examine the elements of the business that make it a worthwhile long-term investment.
Coca-Cola's sales performance
Despite its recent share price decline, Coca-Cola's second-quarter performance was quite good. The company saw a 6% year-over-year rise in revenue to $12 billion. This followed 5% growth in the first quarter, and 11% in 2022.
Coca-Cola expects its trend of rising sales to continue in 2023. For the full year, the company forecast a minimum of 8% year-over-year revenue growth. This estimate is an increase from Coca-Cola's original outlook of at least 7% growth, illustrating the strong sales momentum the company is experiencing. In fact, it's been years since Coca-Cola last reached Q2's revenue level.
Data by YCharts.
Coca-Cola's strategy for long-term success
Coca-Cola's strategy to increase sales is to tap into the public's diverse beverage consumption habits by offering an array of drink choices. For example, the company extended into non-soda beverage options, such as its fairlife brand of ultra-filtered milk touting reduced sugar, and into the coffee business, with the 2019 acquisition of Costa.
The company is now experimenting with alcoholic drinks, partnering with Brown-Forman on a Jack Daniel's and Coke cocktail in a can, which launched in the U.S. earlier this year. A vodka and Sprite canned cocktail is planned for 2024.
This beverage line expansion goes hand-in-hand with an eye toward optimizing its product portfolio to ensure each drink brand is generating successful sales. Consequently, over the past few years, Coca-Cola cut its products in half from approximately 400 to 200 brands. This helps reduce costs, and allows the company to focus resources on its most lucrative products.
For instance, Q2 marked the ninth consecutive quarter of double-digit top-line growth in Coca-Cola's juice, dairy, and plant-based beverages. Its fairlife milk line reached a billion dollars in sales for the first time in 2022.
Another factor enabling Coca-Cola's sales growth is its expanding customer base in developing countries. The share of people living in these countries has grown from 66% in 1950 to 83% today. That number is forecast to increase to 86% by 2050 according to the United Nations, representing nearly an additional 2 billion people. Currently, Coca-Cola's share in these countries is much smaller than what it possesses in developed nations, giving the company an opportunity for years of sales growth.
Other factors that make Coca-Cola a buy
Along with its revenue growth, Coca-Cola is an attractive stock for its ability to produce free cash flow (FCF). The company expects to generate $9.5 billion in FCF this year after subtracting $1.9 billion in capital expenditures, indicating its ability to continue to invest in its business, and still have cash left over.
This enables the company to fund a robust dividend, currently yielding more than 3%. Coca-Cola has increased its dividend annually for a whopping 61 consecutive years.
Excellent FCF generation and reliable dividend combine with sales growth to make Coca-Cola a compelling income stock.
The company's revenue growth illustrates that its strategy of focusing on a smaller set of beverage brands is paying off. Its willingness to experiment with new products and expand as success is proven, as it's doing with its canned cocktail line, shows the iconic company is taking a measured approach to growing its product portfolio. All these factors make Coca-Cola stock a buy.
