Coca-Cola (KO -0.41%) is often considered a safe blue chip stock. It owns the world's top soda brand, it generates plenty of cash, and it pays consistent dividends. But over the past 12 months, its stock declined 3% as the S&P 500 rallied 23%.
Emboldened by the prospects of interest rate cuts, many investors flocked toward the market's higher-growth stocks instead of Coca-Cola. However, I believe it's actually the perfect time to buy Coca-Cola's stock for five simple reasons.
Image source: Coca-Cola.
1. It's a Dividend King
Coca-Cola raised its dividend annually for 62 consecutive years. That puts it in the elite club of Dividend Kings, which grew their payouts annually for at least 50 years. Only the best-run companies can stay in that club, since they need to consistently grow their earnings per share (EPS) and free cash flow (FCF) through recessions to support their rising dividends.
Those annual dividend hikes will also help its investors stay ahead of inflation while compounding their returns. If you had reinvested Coca-Cola's dividends back over the past 40 years, you would have generated a total return of 13,340%.
2. Its yield will become more attractive as interest rates decline
Coca Cola currently pays a decent forward dividend yield of 3.1%, but higher interest rates have boosted the yields of CDs, T-bills, and bonds above 5%. In this environment, many income investors are likely sticking with those safer fixed income investments instead of buying Coca-Cola's stock -- which is riskier and pays a lower yield.
For now, hotter-than-expected inflation reports are dampening hopes for aggressive interest rate cuts this year. But over the long term, Coca-Cola's yield should become more appealing to income investors as interest rates decline again.
3. It will be a safe haven stock if interest rates stay elevated
On the other hand, if interest rates stay higher for longer than expected, Coca-Cola's stock could become a safe haven play again as the higher-growth stocks crumble. In a high interest rate environment, companies that generate a lot of cash -- like Coca-Cola -- will become more appealing than the unprofitable and speculative ones.
Coca Cola's annual FCF fell 15% to $9.5 billion in 2022 as it deliberately increased its inventory to cope with higher commodity prices, but rose 2% to $9.7 billion in 2023. It spent $8 billion of its FCF on its dividend payments in 2023.
4. It's still operating an evergreen business model
Coca-Cola might seem like a risky investment as soda consumption rates decline across the world, but it doesn't only sell its namesake soda and other carbonated beverages. It also sells fruit juices, teas, energy drinks, coffee, bottled water, and alcoholic drinks, and it's been updating its flagship sodas with new flavors, healthier versions, and smaller serving sizes.
That diversification enables Coca-Cola to generate stable growth regardless of the macro conditions. In 2022, its organic sales and comparable EPS grew 16% and 7%, respectively, even as inflation and currency headwinds compressed its margins.
In 2023, Coca-Cola's organic sales and comparable EPS rose 12% and 8%, respectively. In 2024, it expects its organic sales to grow 8%-9% as its comparable EPS rises 4%-5%.
5. It's still reasonably valued
Coca-Cola currently trades at 22 times forward earnings. PepsiCo trades at roughly the same multiple, while Keurig Dr. Pepper looks a bit cheaper with a forward price-to-earnings ratio of 18. However, Coca-Cola still pays a higher forward dividend yield than PepsiCo (2.9%) and Keurig Dr. Pepper (2.6%).
Coca-Cola's reasonable valuation and higher yield should limit its downside potential. It won't blast off anytime soon, but it should be a safe place to park your cash as high interest rates, geopolitical conflicts, and other macro headwinds rattle the markets. That's probably why Coca-Cola remains one of Warren Buffett's top holdings at Berkshire Hathaway, and why its insiders bought more shares than they sold over the past three months.
Simply put, if you're looking for a evergreen dividend stock that will gradually head higher without too much drama, you should buy this boring stock right now as the broader market remains torn between fixed income and growth investments.
