Coca-Cola (KO 0.49%) stock has had a dismal year. As 2023 draws to a close, it's down 7% while the S&P 500 is up by 23%. Although the beverage giant beat the market in 2022, that was an aberration from a trend that has been ongoing for decades.
But investing is all about the future, not the past. So let's look forward and consider whether or not Coca-Cola stock is a buy right now.
The largest beverage company in the world
Coca-Cola is already the largest beverage company in the world, but that's not stopping it from innovating and reporting strong sales growth. It has been managing through years of challenging times, beginning with the pandemic, and moving into the recent inflationary environment.
It restructured to meet changing demand early in the pandemic, creating a more nimble operation that has proven well-suited to this moment. "The global operating environment is always dynamic, and this quarter was no exception," CEO James Quincy said on the third-quarter earnings call.
For example, one of Coca-Cola's greatest strengths is its vast distribution system, which can meet changing demand in every country in which it operates.
The company's on-the-go business is back, and it has experimented with its beverages in areas such as size and packaging to boost demand when customers are switching down in price. At the same time, it has increased prices to offset higher costs, walking a fine line between keeping loyal fans purchasing their favorite drinks while balancing its expenses. This is working so far. Sales increased 8% year over year in the third quarter, and earnings per share (EPS), as well as comparable EPS, rose modestly above last year.
The company has incredible brand power, starting with its eponymous Coca-Cola brand, but it also owns 26 brands that bring in annual sales of at least $1 billion each. Although it slashed its brand collection by about half early in the pandemic to better allocate resources, it still has a portfolio of around 200 beverage brands. These include names you probably know, like Sprite, Minute Maid, BodyArmor, and Fairlife.
This leads to strong pricing power and incredible profitability. Coca-Cola has best-in-class profit margins that are high for a consumer goods company. Consider it next to PepsiCo, Proctor & Gamble, Kimberley-Clark, Keurig Dr Pepper, Kraft Heinz, and Monster Beverage.
KO Profit Margin (Quarterly) data by YCharts.
Is industry growth enough?
So far, so good, but let's get back to that future part. Coca-Cola already has a broad portion of the market in non-alcoholic, ready-to-drink beverages. Unlike some of its peers, drinks are all it sells, and it's king of the court. While that gives it the brand and pricing power, its relative dominance makes it tougher for it to grow its market share.
The company says it has about 35% of the beverage drinker market in developed countries and about half the market in developing countries. It does expect that an expanding addressable market and overall industry growth will help push its sales upward organically.
Image source: Coca-Cola.
Coca-Cola is so large now that although you can count on it for quality performance, Wall Street doesn't see much room for growth. Over the past 10 years, Coca-Cola stock has gained 47%, or about a quarter of the S&P 500's gain.
Is the dividend enough?
Coca-Cola is a Dividend King with one of the longest payout-hiking track records on the market, and its dividend yields 3.1% at the current share price -- nearly double the S&P 500 average.
But that consistency through thick and thin hasn't been enough to excite investors. Coca-Cola stock is solidly in the value box despite its current strong run and culture of innovation, and investors aren't prizing that right now.
How should investors put this all together? Coca-Cola may not go back to beating the market, but you might want to buy it anyway. A properly diversified portfolio should have a range of stocks from value to growth. Coca-Cola provides security, value, and passive income, and it's about as reliable as a dividend stock can be. Those are worthwhile qualities.
It also works as a hedge in challenging times, as illustrated by its market-beating performance last year. If you're looking for a stock that could regularly outperform, Coke might not be the best candidate. But there still may be a place for it in your portfolio.
