Coca-Cola's (KO -0.68%) products are ubiquitous the world over, with operations in over 200 countries and territories. It has long been a core holding within the Berkshire Hathaway stock portfolio, giving it the de facto backing of the Oracle of Omaha, Warren Buffett. And it has a 2.8% dividend yield, which is more than twice the yield of the average S&P 500 (^GSPC -0.03%) stock.
Is Coca-Cola a slam-dunk investment that will set you up for life? Not so fast -- there's some more analysis you'll want to consider before buying it.
What does Coca-Cola do?
Coca-Cola makes beverages. Beverages fall into the consumer staples sector. Consumer staples are generally relatively low-cost necessities that people buy, regardless of the economic environment.
That's a good start, of course, but Coca-Cola's beverages are a bit different because they are a fairly expensive way for a person to hydrate their bodies. Yes, everyone needs to drink. No, that liquid does not need to be a premium Coca-Cola product.
Image source: Getty Images.
What Coca-Cola sells are really affordable luxuries. Most people don't think about the cost of the company's beverages -- they simply know they like them and the price isn't going to break the bank.
This speaks to something incredibly important about Coca-Cola: It is an industry-leading brand manager. Coke, for example, is one of the best-known brands on the planet. Backing up its marketing prowess is the company's distribution might, noting again that it sells products in more than 200 countries and territories. There is no question Coca-Cola is a well-run company, which is why Warren Buffett bought it decades ago.
Coca-Cola's size and scale also has other benefits. For example, it has the financial wherewithal to invest in R&D and the ability to buy smaller competitors. Both help management keep the brand portfolio relevant with consumers over time.
And all this fundamental strength plays into Coca-Cola's status as a Dividend King. A company can't achieve that level of success by accident; it requires a strong business plan that gets executed well in good times and bad.
It would be very hard to suggest that Coca-Cola is a bad company. But Benjamin Graham, who helped train Warren Buffett, often pointed out that even great companies can be bad investments if you pay too much for them.
What is Coca-Cola worth?
Here's the thing: Warren Buffett has owned Coca-Cola for decades. He likes to buy good companies when they are attractively priced and then hold for the long term, benefiting from a company's growth. Just because he owns Coca-Cola today doesn't mean he would buy it today.
For example, the 2.8% dividend yield is higher than that of the market and even above the average consumer staples stock's 2.4%. But it is actually toward the low end of Coca-Cola's yield range over the past decade. That hints that the stock isn't necessarily cheap.
Data by YCharts.
That fact is backed up by traditional valuation metrics. Coca-Cola's price-to-sales and price-to-earnings ratios are both above their five-year averages, for example. To be fair, the company is performing fairly well right now. But it also appears clear that investors are well aware of this fact.
Buying today probably isn't a mistake, per se, but it could mean that you'll face some paper losses in the near term, and you'll need to hold for longer before you really see a material benefit.
Coca-Cola isn't the only consumer staples company
All in, paying full fare, or a bit more, for Coca-Cola probably isn't ideal, but the Dividend King is still likely to be a rewarding long-term investment if you own it long enough. That said, there are other choices in the sector that are more attractively valued, like direct competitor PepsiCo (PEP -0.22%). A couple of other options would be Clorox (CLX -1.09%) and Hershey (HSY 0.50%).
In all three cases, their P/S and P/E ratios are below their five-year averages for those traditional valuation metrics. In other words, if you like to own iconic companies, you don't have to buy an expensive Coca-Cola -- you can buy stocks that are actually on sale.
