In many ways for many investors, Coca-Cola (KO 0.30%) is a model dividend stock. The company is a Dividend King, meaning it has raised its shareholder payout at least once annually for a minimum of 50 years. Its current streak stands at a hard-to-conceive 62 straight years.
Coca-Cola management is well aware that the dividend is a big part of the stock's attraction. That's probably a key reason it raised the payout by a relatively high 5%-plus back in February. Let's take a closer look at that raise and whether it indicates the company is a relatively flat investment these days -- or still has enough fizz to make it a worthy buy.
A fizzy drink, and a fizzy business
While Coca-Cola is most often associated with its signature beverage, it's important to note that as a business it's much more a collection of drink brands.
Many consumers, and even investors, don't realize that in addition to the various versions and flavors of Coke the beverage, the company also holds such familiar items as Minute Maid orange juice, Schweppes soft drinks and mixers, and Powerade sports beverages in its portfolio. In certain European city centers, the company's Costa Coffee chain isn't far away from Starbucks levels of ubiquity.
No other business on this planet has that kind of lineup; Coca-Cola doesn't hesitate to boast that it holds over 200 brands of drinks. That sets it apart from the company many consider to be its archrival, PepsiCo, as the latter's portfolio is stuffed with both beverages and snack foods.
For Coca-Cola, it almost goes without saying that Coke the drink is the 800-pound gorilla of its product selection. Yet, that dizzying array of other drinks gives it the room to push a popular beverage category, or a single hot product, in order to juice (pun intended) its fundamentals.
And since Coke is eternally beloved by many consumers throughout the planet, the company can also kick its prices a bit higher if it needs a jolt to the fundamentals.
With these strengths, Coca-Cola usually finds a way to grow despite its size and maturity as a company. Revenue rose by more than 6% last year over the 2022 tally, to almost $46 billion, and was up by nearly 40% if we place it against the 2020 result.
Profitability has wobbled a bit, but usually comes in strong. This is a disciplined company that sells a hugely popular good that's cheap to make. Its nearly $46 billion in revenue across 2023 filtered down into a headline net income of $10.7 billion, for a very sugary margin of over 23%. That's consistent as Coca-Cola's net margin has hovered within a tight band of 22% to 25% over the past five years.
Meanwhile, the company's free cash flow (FCF) is a thing of beauty. It isn't growing as consistently as revenue, but that's not much of a worry since it's landed just shy of $10 billion in each of the past two years. That's more than enough to fund the dividend, which cost the company a bit under $8 billion in 2023.
But is it a good buy?
Stocks, of course, trade on future potential and valuations far more than historical performance. Coca-Cola's growth is expected to flatten a bit this year, with the average analyst projection of only marginal growth. 2025 should be better, as those prognosticators are modeling a nearly 5% jump on the top line. Profitability looks a little tastier, given that the collective estimate for 2024 per-share net income growth is 4% this year and nearly 7% in 2025.
As for valuations, Coca-Cola stock currently trades at a forward P/E of nearly 24, which on first glance might seem rich given that anticipated single-digit growth. Yet we also have to factor in that dividend, which the company is unlikely to stop increasing and already boasts an attractive yield of 3.2%, well above the average for the S&P 500 index, of which it's a component.
So for me, this is a fine stock for the buy-and-hold types out there. I can't foresee this company ever losing money, and the stacks of cash flow it can produce should allow it to maintain its Dividend King status for a long time to come. I've been a Coca-Cola bull for years now, and I don't see that changing anytime soon.
