Coca-Cola (KO 1.23%) stock rallied on Tuesday after the company posted a third-quarter beat for both its revenue and earnings per share and kept its full-year outlook intact. The move extends a multi-week upswing that had already pushed the shares significantly higher. In total, the stock is up more than 7% over the past month.
Is the beverage giant's stock still attractive now? Or has the run-up made the stock fully priced?
For investors who value a steady stream of dividend income, I'd argue that it's probably not too late to buy shares.
Image source: Getty Images.
Recent performance supports the bounce
Coca-Cola's third-quarter revenue rose 5% to about $12.5 billion, and organic revenue increased 6%. Non-GAAP earnings per share rose 6% to $0.82. Analysts, on average, were expecting revenue and adjusted earnings per share of $12.41 billion and $0.78, respectively.
The company's pricing power was particularly evident in the quarter; all of Coca-Cola's organic revenue growth was attributable to growth in price and product mix, while concentrate sales were flat year over year. But management did note that case volume improved slightly (up 1% year over year). The fact that sales grew as robustly as they did with only a slight uptick in volume highlights the strength of Coca-Cola's pricing power.
Margins also looked good. Non-GAAP operating margin improved to 31.9% from 30.7% a year ago as the company controlled costs even while stepping up marketing.
For the full year, Coca-Cola reiterated guidance for 5% to 6% organic revenue growth.
"While the overall environment has continued to be challenging, we've stayed flexible -- adapting plans where needed and investing for growth," Coca-Cola Chairman and CEO James Quincey said in the company's earnings release. "By offering choice across our total beverage portfolio and leveraging our franchise model's unique strengths, we're gaining ground and strengthening our leadership position."
Helping explain the stock's recent move higher, expectations for 5% to 6% organic revenue growth are impressive for a "challenging" environment.
NYSE: KO
Key Data Points
A reasonably priced, high-quality dividend stock
With management guiding for free cash flow of at least $9.8 billion for the full year, excluding one-time factors related to acquisitions, Coca-Cola is well-positioned to continue supporting its robust dividend.
Coca-Cola raised its quarterly payout to $0.51 in February, marking the company's 63rd straight annual dividend increase. That is $2.04 per share on a full-year basis, giving the stock a dividend yield of about 3% -- a yield that comfortably exceeds the S&P 500's dividend yield of about 1.2%. Notably, the $8.5 billion the company pays out in dividends annually is well-covered by the company's $9.8 billion in expected free cash flow.
What about valuation? On management's non-GAAP 2025 earnings per share target, the stock trades at a forward price-to-earnings multiple of just under 25. For a consumer staple with mid-single-digit organic growth and a long dividend record, that price looks reasonable.
Of course, there are some real risks to keep in mind. One is the company's weak case volume growth and its flat sales of concentrate. These results put more pressure on continued price increases and mix improvement. For now, this is working. But there's no guarantee this approach is sustainable.
Overall, however, Coca-Cola looks solid. Organic growth is impressive, and non-GAAP operating margin improved despite higher marketing and input costs. Further, free cash flow should comfortably cover the dividend and leave room for reinvestment.
After the pop, the easy gains might be behind the stock in the near term. Still, for investors looking to bolster their portfolio with reliable income over the long haul, Coca-Cola still looks like a reasonable buy.
