Since it isn’t possible to know the timing of the start of any bull market, the trick is to own stocks that can deliver strong returns through a wide range of economic environments. That’s a harder feat than it sounds, though, as few businesses can navigate through swinging consumer preferences and demand.
Coca-Cola (KO -0.25%) has secured a spot near the top of that list of stable winners. The beverage giant for decades has been winning market share in a massive global industry. Its financial strength puts it in a class of its own, too. Let’s look at a few reasons to consider buying this beverage stock now.
Don’t let Coke’s size fool you into thinking this isn’t a growth stock. On the contrary, organic sales expanded 12% this past quarter following a blistering 16% increase in the last full fiscal year. The early 2023 growth came through a balance of rising sales volumes and much higher prices. That’s good news considering peers like PepsiCo (NASDAQ: PEP) are relying entirely on increased prices to drive sales.
The drink giant is seeing strong demand for core brands like Coke, Sprite, and Fanta, which are among the top-selling beverages consumed around the world. Yet it is also using its unparalleled distribution network to capitalize on growth niches like energy drinks, waters, teas, and sports drinks. Wins in these areas have Coke targeting a further 7% to 8% sales uptick in 2023 even as global economic trends slow.
Income investors have long been attracted to Coke’s stock due to its rock-solid finances. These positive factors have only improved in recent quarters. Coke is sitting on over $13 billion of cash today and is expecting to generate roughly $10 billion of free cash flow this year.
Operating profit margin in the first quarter improved to 32% of sales from 31% a year ago, at a time when many consumer-facing stocks are reporting weaker profitability results. “We have the right portfolio, the right strategy, and the right execution,” CEO James Quincey told investors back in late April.
Shareholders will see direct benefits from that success as Coke sends those ever-increasing dividend checks. The company has raised that annual payment for 60 consecutive years spanning many recessions and bull markets.
The price and value
As you might expect, Coke stock is valued at a premium that reflects many of these positive investment characteristics. The shares are priced at over 6 times annual sales, or about double Pepsi’s valuation.
Coke delivers twice the profit margin as Pepsi, though, and a portfolio that’s more focused on the beverage industry. This positioning was valuable during the economic expansion in late 2020 and 2021 and will likely pay off for patient investors once the next upswing occurs.
In the meantime, shareholders can simply hold the stock and reinvest Coke’s dividend payments so that returns are amplified over long stretches of time.