The Dow Jones Industrial Average recently touched a 2023 record, rising to an 8% overall return through late November. Investors have been thrilled to see signs of slowing inflation and strong economic growth, and are responding to the good news by pushing the index higher.
Not all Dow stocks are benefiting from this surging optimism. Coca-Cola (KO +0.11%) shares are down 8%, in fact, making the beverage giant the sixth worst-performing stock out of the 30-member index.
Let's look at why Wall Street is down on Coke and how that pessimism could set investors up for excellent long-term returns.
No need to worry
Coke's business trends aren't what you might expect to see from one of the Dow's worst performers of the year. Organic sales were up a healthy 11% in the most recent quarter. That's better than PepsiCo's 6% increase in its beverage division in Q3.
The business benefited from strong demand for its on-the-go drinks, both for traditional sodas and growth niches, such as energy drinks and sparkling water.
NASDAQ: PEP
Key Data Points
Coke isn't being forced to slash prices to keep volumes rising, either. Rather, prices increased 9% this past quarter and volume was up 2%.
"We delivered an overall solid quarter," CEO James Quincey said in a late October press release.
Profits and cash flow
There's a lot to like about Coke's earnings and cash-flow trends, too. Profitability ticked up to 30% of sales last quarter, thanks to the combination of higher selling prices, rising volume, and cost cuts. Free cash flow has been ample so far this year at $8 billion, up from $7.9 billion a year earlier.
KO Operating Margin (TTM) data by YCharts.
These successes have given management flexibility to invest aggressively in growth initiatives and to support popular brands like Smartwater. They also likely mean much more cash will be headed to shareholders' pockets through dividends and stock buybacks. That dividend has increased in each of the last 60 years and is on track to approach $8 billion of total payout in 2023.
Price and value
Coke looks expensive when compared to PepsiCo, which is valued at about half of its price-to-sales valuation. But Coke is also priced at a discount to what investors have been used to paying for the stock over the last few years. At less than 6 times annual sales today, its premium has only been lower -- briefly -- during the market slump at the start of the pandemic.
Yet Coke's business is stronger than it was almost four years ago, both in terms of annual sales and annual earnings power. The beverage titan's dividend is likely to continue rising and complementing shareholders' overall returns. Management is forecasting an 8% earnings increase in 2023 following last year's 7% boost.
Given that accelerating profit gain, it's hard not to conclude that Wall Street is missing the bigger picture on this stock. Coke has a bright future ahead in a massive consumer staples industry niche.
Sure, sales growth won't reach levels that might be more associated with popular tech stocks. But in exchange for slower revenue gains, investors get stability, high profits, and ample cash flow. Those factors should support market-beating returns over the long term.
