The market's strong showing this year may have you feeling like you've missed the boat. After all, the S&P 500 has gained 19.4%. But patient, long-term investors shouldn't worry. You can always buy strong companies.
Coca-Cola (KO) has been around since the late 1800s, a testament to its staying power and strength. While that's an impressive feat, what about its prospects today? For that, we need to delve further and analyze the company's current fundamentals.
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Cash machine
Coca-Cola sells popular soda brands worldwide, and these accounted for 69% of last year's unit case volume. It also distributes other beverages like water, sports drinks, juice, dairy, and plant-based beverages, which represent a significant portion of volume. That's an important consideration since people have been moving toward healthier alternatives.
Fortunately, these products generate plenty of free cash flow (FCF). For the first three quarters of the year, Coca-Cola's FCF was $7.9 billion. And the company shares the wealth by paying dividends and buying back shares. This year, it spent $1.2 billion on repurchasing shares. The company also paid $4.1 billion of dividends.
The board of directors deems dividends so important, they have raised them for 61 straight years. That makes Coca-Cola part of the esteemed Dividend Kings, a stock that has increased payments annually for at least half a century.
Coca-Cola's stock has a 3.1% dividend yield, more than double the S&P 500's 1.5%.
Unspectacular growth
Coca-Cola products have become a mainstay in homes and venues, selling about 33 billion cases in more than 200 countries last year. That means the days of fast growth are probably behind it. Since it's producing over $40 billion in annual sales, it takes a lot to move the needle. Unit case volumes across the various categories was 1% to 2% for the quarter.
For the first nine months of the year, Coca-Cola's adjusted revenue, which excludes foreign exchange translations and acquisitions/divestitures, increased by 11%. However, the majority -- 10 percentage points -- came from higher prices and the product mix. The company continues to grow profits, with earnings per share growing by 14%.
However, it's unclear how much more Coca-Cola can raise prices before customers push back.
Valuation
Coca-Cola's stock has recovered somewhat from a couple of months ago, when it was down by about 18%. Yet, it's still down 8% so far this year. That's translated into a better valuation. The stock's price-to-earnings (P/E) ratio has dropped this year from about 28 to 23. In comparison, the S&P 500 sells at a 25 P/E multiple.
With its better valuation than the overall market, reliable free cash flow, and history of higher dividends, income-oriented investors may wish to consider purchasing Coca-Cola's stock. If they're seeking a company with fast growth, investors will find better opportunities elsewhere.
