Is It Too Late to Buy Coca-Cola Stock?

Investors considering a purchase of Coca-Cola (KO) stock face a bit of a dilemma.

In the last 30 years, shares of the beverage giant have produced a total return (including dividends) of 1,130%. That lags the gains for the broader S&P 500. And yet, over the very long term, this top beverage stock has made for a solid investment. It's part of why Coca-Cola is the fourth-largest holding in the Warren Buffett-led Berkshire Hathaway's massive equities portfolio.

Then there is the fact that the company carries a market cap of $260 billion and sells beverages in more than 200 countries across the world. It is the leading nonalcoholic ready-to-drink company on the face of the planet, with 2023 revenue of $46 billion. But that also means it's everywhere already, so where else can it go?

These conflicting thoughts have some asking whether it's too late to buy Coca-Cola stock. Let's see if we can find an answer.

Coca-Cola is quenching the world's thirst

It's hard to understate Coca-Cola's dominance. With its popular product lineup that includes Coca-Cola, Sprite, Dasani, Minute Maid, Costa Coffee, Gold Peak Tea, Fanta, and Powerade, among many other brands, it has top market share. The company's products are sold at over 30 million retail locations.

Thanks to its long and successful history, Coca-Cola has built up a widely recognized brand. That supports its economic moat. Consumers are loyal and aren't likely to switch to products provided by competing firms. And this results in pricing power, a very attractive characteristic for a business.

The brand success also means Coca-Cola can execute some production actions competitors can't get away with. For instance, Much of its beverage production and distribution (including the costs) are handled by bottlers around the world it partners with. Coca-Cola just licenses the brands and provides the flavorings in many cases. This ends up being a huge cost-saving move for Coca-Cola. Consequently, it creates an extremely profitable enterprise. In the last decade, Coca-Cola's gross margin has averaged a superb 60.4%. This is better than other consumer favorites like Apple and Nike.

Given the mature nature of the industry, even after investing in growth initiatives, management has ample cash left over to return to shareholders. The company spent $2.3 billion on share buybacks last year. And it currently pays a dividend that yields 3.2%, which is enticing to income-seeking investors. That dividend has been raised consistently every year for more than 50 years, qualifying it as a Dividend King.

Can Coca-Cola stock beat the market?

If you're looking for a mature and stable business to add to your portfolio, I don't think anyone would argue that Coca-Cola doesn't makes for a worthy investment candidate. But if you're someone looking to produce stronger returns over the long term, it's a different story.

In the last one-, three-, five-, 10-, 20-, and 30-year periods, the stock has underperformed the S&P 500 on a total return basis (including dividends). That's not a great track record.

As of this writing, the stock trades at a price-to-earnings ratio of 24.4. That's a slight premium to the S&P 500 at 23.1. Investors need to ask if it's worth paying an above-market valuation multiple for a business that consistently lags the large index.

Part of the reason Coca-Cola generates mediocre returns is that it has minimal growth potential. Revenue in 2023 was lower than it was in 2013. During this time, diluted earnings per share increased at a compound annual rate of 2.7%, respectively, in the past 10 years. It's difficult to think that these trends won't continue for the foreseeable future.

The executive team touts that only a small fraction of the world's population are customers. And they think that the business can get a boost by gaining a greater share in developed and emerging markets, as well as benefit from ongoing population growth.

However, investors shouldn't be optimistic that consumers' drinking habits are suddenly going to pick up significantly. Coca-Cola operates in a low-growth industry. It's not a high-flying tech enterprise attacking a massive and expanding market opportunity.

This is undoubtedly one of the world's most iconic brands. But if you are looking for market-beating growth, it's too late to buy the stock.