Coca-Cola (KO +1.74%) might be Warren Buffett's favorite stock, its brand is unbeatable, and it's the largest beverage company by sales. So it might be surprising that over the past year, five years, and 10 years, Coca-Cola stock has underperformed the broader market, even with its dividend.
In 2023, the S&P 500 has gained 14%, while Coca-Cola stock has lost 11%. Are Coke's growth days long gone? Why should you consider owning Coca-Cola stock? Let's take a look.
Why Warren Buffett loves Coca-Cola
Let's first back up and acknowledge that for many years, Coca-Cola outperformed the market. But it goes really far back -- you'd have to have bought shares more than 30 years ago to have outperformed the market. Warren Buffett bought $1.3 billion of shares of Coca-Cola stock between 1988 and 1994, so his investment came in partially within that time frame.
Buffett is very open about what he looks for in a stock, and he has praised Coca-Cola many times for its positive qualities. It has incredible brand power, and it reaches customers worldwide with popular beverages and innovation. Buffett often talks about the American consumer as the driver of the future economy, and Coca-Cola has a wide place in that future.
It can also charge higher prices because of its strong brand and customer loyalty. It's a cash machine, with a well-oiled model and unmatched distribution system. The innovations it makes and changes it undergoes don't require huge overhauls.
It did make a major reconfiguration early in the pandemic to become even more efficient, and it slashed half of its brands from its portfolio. It now has around 200 labels, and 26 of them bring in more than $1 billion annually.
It uses its cash to reward shareholders, with a high payout ratio that's usually around 75%. That leaves it with enough funds to tweak recipes, try new ones, and keep doing what it does best, while demonstrating its value for its shareholders.
Why the market doesn't love Coca-Cola
Coca-Cola's operating performance has been impressive despite the fluctuating economy. In the 2023 third quarter, revenue increased 8% while earnings per share rose 9% to $0.71. Operating margin narrowed from 27.9% to 27.4%, but it was a mostly solid showing, and it's been demonstrating this kind of strength over the past few years. Coca-Cola is managing through this challenging time with its robust model and brand.
So why is Coca-Cola stock down this year?
NYSE: KO
Key Data Points
It's partially a reaction to its market-beating performance in 2022, when it returned 11% to shareholders while the S&P 500 lost 18%. In 2023, investors are leaving the safe stocks they ran to last year, in a show of confidence in growth stocks.
That doesn't explain its underperformance over the past few years, but Coca-Cola is not a growth stock, and it hasn't been for decades. It's a value stock. At its size, and with its slow-growing model, it's not going to achieve the same kind of dazzling performance that gets investor dollars rolling.
That doesn't mean it will never again outperform the market; it did last year, and it's actually outperforming the S&P 500 over the past month, despite the market's recent rally.
The stock may deserve a place in your portfolio
Investors should consider Coca-Cola stock for what it can offer, and not what it can't. A diversified portfolio that has the best chance of beating the market and providing value for investors should have a broad range of stocks that each bring something different to the table.
Coca-Cola is a rock-solid investment that pays a reliable, growing dividend, which is a great source of passive income. At the current price, Coke's dividend yields 3.2%. That kind of dependable income could be an important asset to a retiree or anyone looking for a steady check in the mail.
And it may not beat the market, but it's likely to appreciate over time, with nearly no risk. These are qualities that could be important to risk-averse investors -- or really to any investor -- as ballast in a fortified portfolio.
