Coca-Cola (KO 0.15%) stock captures a lot of market attention. It's one of Warren Buffett's favorite stocks, it's a classic Dividend King, and Coca-Cola's products are ubiquitous across most of the world.
Coca-Cola began to look a bit tired leading up to the pandemic, but since making some major restructuring and operational changes to manage through the initial challenge, it's been performing much better. Sales are up, and it has a leaner, more productive product line. Let's see where it's going, and where you can expect to see it three years from now.
Growing sales and profits
Prior to the pandemic, Coca-Cola's sales were growing modestly. Generating high growth for the largest global beverage company is no easy feat. After dramatic sales declines when the pandemic hit, Coca-Cola restructured its operations and slashed its underperforming brands, about half of the total, from its portfolio. It also stepped up its innovation in size and packaging to reach customers in supermarkets. All of these actions continue to impact it positively even as the takeaway business is back in action.
Now it's struggling with inflation, but because it has a large and loyal fan base, it has managed to raise prices without curbing demand too strongly. Revenue increased 8% year over year in the 2023 third quarter, with organic revenue, or revenue from existing brands, up 11%. That nicely illustrates how much consumers enjoy its brand, and it speaks to the ongoing opportunity the company has to leverage its brand and the resulting relationship with customers.
The beverage behemoth also managed to increase earnings per share (EPS) in the quarter, from $0.65 last year to $0.71 this year. Operating margin, however, contracted from 27.9% to 27.4%.
Three years from now, inflation is likely to be tamed and presenting less of a threat than it does today. Coca-Cola is leveraging its brand, unmatched distribution network, and culture of innovation to manage through this challenging time, and as a leaner and stronger company, it should be in an even more formidable position going forward.
In the best scenario, sales will likely grow in the high single digits, and EPS will keep pace. If there's more pressure, that could be low- to mid-single digits. Worst-case scenario they decline, but that would be an unusual case such as the pandemic, and a very unlikely outcome. To give a sense of how things usually go, organic sales have increased at an average of 7% annually over the past five years with comparable EPS up 6%, on average.
Gaining market share globally
Coke does seem to be ubiquitous worldwide, so it might be surprising to learn that the company still has plenty of market share to conquer. In developed markets, it has about 30% of the market share, while in developing markets, it has only about 10%. In developing markets, many potential customers don't yet consume commercial beverages. So while the opportunity looms large, it could be a huge marketing task to introduce its products to these populations.
Regardless, the organic opportunity continues to expand for current markets. What was a $650 billion opportunity in 2017 has doubled to $1.3 trillion today. As the largest purveyor of non-alcoholic beverages, Coca-Cola benefits from industry growth.
Most of its categories are expanding at a compound annual growth rate (CAGR) in the mid-single digits. The emerging drinks category is growing at a CAGR of 9% to 10%, and Coca-Cola is a star in creating new drinks and categories. It also has the cash to acquire beverage companies that lean into this kind of growth and add tremendous value to its brand portfolio. Its most recent large acquisition was BodyArmor in 2021.
Increasing its dividend and buying back shares
Coca-Cola has raised its dividend annually for the past 61 years, one of the longest streaks on the market. It takes that commitment to shareholders very seriously, and it continued to pay and raise its dividend even when sales tanked during the pandemic and the payout ratio reached over 100%.
In general, Coca-Cola has more than enough cash on hand to pay its dividend, buy back shares, and still have plenty of money left to fund new initiatives. The payout ratio is at a five-year low as it increases free cash flow and cash holdings.
KO Payout Ratio data by YCharts
Coca-Cola's dividend yields 3.2% at the current price, and it usually hovers somewhere around 3%.
Nothing is a given
I want to qualify this optimistic take by cautioning investors that nothing, even Coca-Cola's storied dividend, is a given. I really do feel optimistic about Coca-Cola's prospects based on all of the above, but there are so many things that could derail its plans.
However, that applies to every company, and Coca-Cola is more reliable than most. Three years from now, it should be in a solid position, growing and creating shareholder value.
