Coca-Cola's (KO +0.31%) stock returns and its business are moving in opposite directions these days. The beverage giant just reported positive operating trends for fiscal 2023, and yet Coke was among the weakest performers on the Dow Jones Industrial Average for the year. Shares have gained just 2% in the last 12 months compared to the Dow's 19% rally.
Does that performance gap pave the way for market-beating returns for investors willing to buy Coke stock today? Let's take a closer look.
Sales trends
The biggest knock against Coke's business is that growth has been less than sparkling. Sure, organic sales gains were 12% in 2023 on top of a 16% spike in the prior year. Yet this past year's increase came almost entirely from rising prices; Coke's sales volume growth slowed to 2% last year from 5% in 2022. It's not a great sign for future sales trends that shoppers are scaling back on their soda purchases.
NYSE: KO
Key Data Points
That soft momentum will likely continue into 2024 as well. Coke is calling for organic sales growth to slow for a second straight year, declining to between 6% and 7% gains in 2024. Investors are hoping that the company can get back to double-digit expansion that includes both rising prices and higher sales volumes. For now, though they'll have to accept market share growth in a sluggish industry. Rival PepsiCo is calling for just 4% organic sales gains this year.
Profit margins
Coke is squeezing the most out of its slower growth profile, though, and that's great news for shareholders. Non-GAAP earnings jumped a healthy 16% in 2023 thanks to a combination of cost cuts, rising prices, and higher demand for non-core beverages like sparkling waters and energy drinks.
Those wins helped operating profit margin expand to a blazing 29% of sales, or nearly double PepsiCo's result. "We expect to see margin expansion [in 2024]," CFO John Murphy said in a recent conference call with investors.
Cash returns are another bright spot lifting shareholders' overall returns. Coke generated about $10 billion of free cash flow in 2023 and returned nearly the same amount to investors through stock buybacks and a rising dividend.
The dividend payment has increased for over 60 consecutive years, giving Coke one of the longest track records on the market. Cash flow is projected to drop in 2024, but that's mainly because of one-time tax payment issues. The long-term outlook is highly positive for Coke's cash trends, and so investors can count on further steady dividend growth over the coming years (and decades).
The price cut
Happily, you can pick up Coke's stock at a relative steal today. Yes, its price-to-sales ratio of 6 is about double PepsiCo's comparable metric. Yet investors were paying over 7 times sales for this business at several points in the past three years. The weak performance of the stock in the past 12 months reduces the risk that you'll pay too high of a price for this company.
Investors have to balance those positive factors against the likelihood that Coke will report some softer sales trends in the short term. The stock might respond to that sluggishness by staying relatively weak through most of 2024, but that's a small price to pay to gain exposure to one of the strongest consumer staples companies on the planet. Coke deserves a spot on most investors' watch lists for 2024 and beyond.
