Coca-Cola (KO -0.43%) is the kind of stock you buy when it is reasonably priced and hold on to forever. Right now could be just such a buying opportunity, given the 15% stock price decline over the past year, most of which has occurred in just the past three months. Not only is Coca-Cola a longtime member of the S&P 500 index, but it is also a Dividend King.
Coca-Cola gets one thing right
To be honest, I’m a PepsiCo (PEP -0.24%) person. I like that PepsiCo has a strong beverage business, an even stronger salty snack operation, and a respectable position in packaged food products.
While I prefer the diversification PepsiCo offers, Coca-Cola is easily the world’s most dominant soda company. It also does a good job in other beverage categories, including sports drinks and coffee. While I view Coca-Cola as something of a one-trick pony, there is something to be said for owning a pony that, basically, does one “award winning” trick.
Image source: Getty Images.
To put a finer point on it, Coca-Cola has been around since 1886. It started as a U.S. brand, but the company’s products are now sold in over 200 countries and territories around the world. Management believes that “beverages bearing trademarks owned by or licensed to the Company account for 2.2 billion of the estimated 64 billion servings of all beverages consumed worldwide every day.” In 2023, the $260 billion market cap company generated revenue of nearly $45.8 billion.
The company’s size and reach are important to highlight in another way. Essentially, Coca-Cola makes drinks that are sold to retailers and restaurants. Those retailers and restaurants then sell the beverages to end consumers. Coca-Cola’s massive distribution system, marketing strength, and innovation experience make it a vital partner to its direct customers.
Retailers and restaurants basically want to sell Coca-Cola products because of both end customer demand and the benefits and services that come along with working with Coca-Cola. It is a vital and trusted partner.
The long-term results speak for themselves
There are a number of ways to assess a company’s long-term performance, but for dividend investors one of the best is the number of years a company has increased its dividend. In the case of Coca-Cola, that number is 62 consecutive years and counting. This makes the consumer staples giant a Dividend King, an elite group of companies. You don’t become a Dividend King without consistently executing at a high level.
KO Revenue (Annual) data by YCharts
Looking at actual financial results, Coca-Cola’s revenue has increased over 500% since 1985. Earnings per share have grown more than 2,000%. Performance ebbs and flows over time, as the chart above highlights, but its EBITDA margin and profit margin have been consistently high and above the numbers that PepsiCo has put up. Coca-Cola is a very well-run business.
KO Profit Margin data by YCharts
This brings the story back to buying the stock. Good businesses like Coca-Cola don’t go on sale very often. You should probably be happy to simply get a fair price (and add to the position if the stock really gets cheap). Coca-Cola’s 3.1% dividend yield is currently in line with its average yield over the past decade. Its price-to-sales and price-to-earnings ratios are both a bit below their five-year averages as well. While it wouldn’t be fair to suggest that Coca-Cola stock is cheap, it does appear to be at least fairly valued.
It’s hard to argue with success
There are reasons why you might choose another consumer staples stock over Coca-Cola (a lack of product diversification, for example). However, if you don’t mind owning a company that does one thing and does it very well, Coca-Cola looks like it is attractively priced right now, which includes a well-above-market dividend yield backed by a growing dividend.
It would be hard to argue with anyone who chose to buy shares of this iconic company today with the goal of holding on to it forever.
