Coca-Cola Stock: Time to Buy More or Tap Out?

March 20, 2023 at 11:32 AM EDT

Amid high inflation and rising interest rates, beverage giant Coca-Cola's (KO) 60-year-old dividend-paying record makes it a safe haven for investors. However, the stock has declined 5.6% year-to-date. So, should you buy the stock now? Read more to find out...

The Federal Reserve is expected to increase interest rates this year to combat high inflation despite the turbulence in the banking industry. As a result, the chances of a recession are high. Hence, I think now is the time to scoop up quality stock The Coca-Cola Company (KO), which pays stable dividends and stands out as a dependable investment option.

Before I discuss why I am bullish on this stock, let’s discuss the economic backdrop quickly.

Given the tight job market and stubborn inflation, the Fed was expected to raise interest rates by 50 basis points. However, the recent bank failures have complicated decision-making for the central bank.

According to Wall Street experts, the Fed could approve a quarter-percentage-point increase in interest rates at the next policy meeting. This consensus has emerged despite fluctuations in rate expectations over the past two weeks.

KO has established itself as a reliable company that returns value to its shareholders through dividends. It has an impressive 60-year record of dividend payments. KO’s annual dividend of $1.84 yields 3.05% on the current share price. It has a four-year average dividend yield of 3.05%. Additionally, its dividend payouts have increased at CAGRs of 3.4% and 3.5% over the past three and five years, respectively.

Moreover, KO surpassed analysts’ fiscal fourth-quarter earnings and revenue estimates. Looking ahead, KO anticipates organic revenue growth between 7% and 8% for the fiscal year 2023. It also expects growth in non-GAAP comparable currency-neutral EPS to range between 7% and 9% and non-GAAP comparable EPS growth between 4% and 5%.

Its net income has grown at a CAGR of 50.2% over the past five years, while EPS has grown at a CAGR of 49.8% over the past five years.

However, the stock declined marginally intraday, closing its last trading session at $60.02. It has declined 5.6% year-to-date and 4.4% over the last three months.

Here’s what could influence KO’s performance in the upcoming months:

Solid Financials

During the fiscal third quarter that ended September 30, KO’s non-GAAP net operating revenues increased 10% year-over-year to $11.05 billion. Its non-GAAP gross profit rose 6.5% from the prior-year quarter to $6.54 billion.

Also, the company’s non-GAAP net income increased 6.7% year-over-year to $3.01 billion, while its non-GAAP EPS came in at $0.69, representing an increase of 6.2% year-over-year.

Robust Profitability

KO’s trailing-12-month gross profit margin of 58.14% is 84.8% higher than the 31.46% industry average. Its trailing-12-month EBIT margin of 28.49% is 273.1% higher than the industry average of 7.64%, and the stock’s trailing-12-month net income margin of 23.19% is 503.4% higher than the industry average of 3.68%.

Moreover, its trailing-12-month ROCE, ROTC, and ROTA of 40.51%, 11.16%, and 10.29% are 286.4%, 77%, and 160.3% higher than the respective industry averages of 10.48%, 6.31%, and 3.95%.

Favorable Analysts Expectations

KO’s EPS and revenue are expected to rise 4.7% and 4.1% year-over-year to $2.60 and $44.80 billion, respectively, in the current fiscal year 2023.

Moreover, analysts expect KO’s EPS to improve by 1% year-over-year to $0.65 in the current fiscal quarter (ending March 2023). Its revenue will likely rise 2.9% from the prior-year quarter to $10.81 billion in the current quarter. It has surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.

POWR Ratings Reflect Promising Prospects

KO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. KO has an A grade for Quality, consistent with impressive profitability.

KO also has a B grade for Stability, in sync with its 60-month beta of 0.54.

In the A-rated Beverages industry, it is ranked #19 among 36 stocks.

Click here for the additional POWR Ratings for KO for Sentiment, Growth, Value, and Momentum.

Bottom Line

As investors navigate the volatile stock market, KO's consistent dividend payouts offer stability and reliability.

Furthermore, the company has experienced consistent increases in both revenue and EPS in the past, and this trend is expected to continue due to its extensive global presence.

Given KO’s solid fundamentals and high profitability, I think the stock is an ideal buy now.

How Does The Coca-Cola Company (KO) Stack up Against Its Peers?

While KO has an overall POWR Rating of B, one might want to consider looking at its industry peers, PepsiCo, Inc. (PEP), Ambev S.A. (ABEV), and National Beverage Corp. (FIZZ), which have an overall B (Buy) rating.

Consider This Before Placing Your Next Trade…

We are still in the midst of a bear market.

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5 Warnings Signs the Bear Returns Starting Now!
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KO shares were trading at $60.34 per share on Monday afternoon, up $0.32 (+0.53%). Year-to-date, KO has declined -4.41%, versus a 2.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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