Coca-Cola (KO 0.91%) remains one of the world's most respected companies. It owns more than 200 unique beverage brands, and a global footprint makes it one of the most successful beverage companies in the world.
However, with the company operating everywhere, achieving growth becomes increasingly difficult. Although revenue and earnings have continued to increase, investors should not count on the beverage stock to beat the market. Here's why.
The state of Coca-Cola
For all of Coca-Cola's problems, investors can feel assured that neither the company nor its brands are going anywhere. Amid price increases, customers are mostly staying loyal to its brands.
Unfortunately for shareholders, companies typically need to thrive rather than merely survive to drive significant returns. The stock continues to rise, but it has underperformed the S&P 500 for years. Moreover, the 2023 earnings report indicates prosperity will not return anytime soon.
NYSE: KO
Key Data Points
Its 2023 net operating revenue rose 6% from year-ago levels to $46 billion. Still, Coca-Cola raised prices 10% in 2023 and 11% in 2022, meaning revenue did not grow in proportion to price increases.
The company's net income rose 12% to nearly $11 billion. While that seems like a decent return, higher spending on operating charges and property and equipment took a toll on free cash flow.
In the end, 2023 free cash flow was $9.7 billion, but that was up only 2% from 2022 levels. During that time, the company spent over $8 billion in dividends, 4% more than year-ago levels. Since the company spent $1.7 billion in net share repurchases, it had little capital to reinvest in the business.
Coca-Cola's challenges
Additionally, the dividend costs are potentially problematic because the company has increased its dividend for 62 straight years. This gives it Dividend King status, which is both a benefit and a trap. The Dividend King status raises demand for shares, but if the company walked away from this status, its share value would likely suffer for years as such a move would probably undermine confidence in Coca-Cola stock.
Moreover, the company does not seem intent on improving this situation. Coca-Cola chose to hike the payout by more than 5% this year to $1.94 per share annually. The company can maintain Dividend King status with any level of increase, so it is not a good sign that the dividend rises at a rate that exceeds free cash flow growth.
Furthermore, larger increases may be unnecessary since shareholders can earn a dividend yield of 3.3%, more than double the S&P 500 average of 1.4%. With the burden of the dividend hampering Coca-Cola and its stock price growth, few investors may want to add shares, especially at a price-to-earnings ratio of 24.
That premium may explain why one longtime shareholder, Warren Buffett's Berkshire Hathaway, has not purchased additional shares since 1994. Still, with Berkshire set to earn $776 million in dividends this year on an original $1.3 billion investment, Berkshire and other long-term shareholders have every incentive to hold their shares.
Stand pat on Coca-Cola stock
Unfortunately, Coca-Cola stock will likely leave most investors thirsty. Indeed, its brands remain popular amid price increases, and its 62-year streak of payout hikes is not likely to end anytime soon.
Nonetheless, the cost of dividend payments and share repurchases leaves Coca-Cola with little capital to invest in itself. Hence, investors should assume it will continue to underperform the S&P 500. While long-term shareholders will drive considerable returns from dividends, the stock seems to offer little to other investors.
