Don't Be Shy. Buy the Dip in This Blue-Chip Stock

With a $244.08 billion market cap, the Coca-Cola Company (KO) manufactures, markets, and sells various nonalcoholic beverages worldwide under brands, including Coca-Cola, Sprite, Minute Maid, Fanta, Dasani, Aquarius, and Gold Peak. The company operates through a network of independent bottling partners, wholesalers, distributors, retailers, and bottling distribution operators.

KO is a well-established company with an excellent reputation and strong brand name. The company continues to be consistently profitable, even during an economic downturn, due to its non-cyclical nature. It reported impressive second-quarter results demonstrating resilience in the marketplace amid the ongoing macroeconomic challenges.

“Our results this quarter reflect the agility of our business, the strength of our streamlined portfolio of brands, and the actions we’ve taken to execute for growth in the face of challenges in the operating and macroeconomic environment,” said James Quincey, KO’s Chairman and CEO.

In September, Molson Coors Beverage Company (TAP) announced that it had expanded its exclusive agreement with KO to develop and commercialize Topo Chico Spirited, a line of spirit-based ready-to-drink cocktails. This might boost KO’s revenue stream.

The company’s sound business model, solid earnings, and cash flow position it to pay attractive dividends to its shareholders. It pays $1.76 as dividends annually, which yields 3.12% at the current share price. Its 4-year average dividend yield is 3.09%. Its dividends have increased at a CAGR of 3.1% over the past three years and 3.6% over the past five years. The company has increased its dividends for 59 consecutive years.

KO has been beaten down amid the recent market turbulence, plunging 12.4% over the past six months and 4.8% year-to-date to close the last trading session at $56.44. However, this offers buy-the-dip opportunities for long-term investors.

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

Solid Financials

KO's net operating revenues increased 11.8% year-over-year to $11.33 billion in the fiscal 2022 second quarter ended July 1, 2022. Its gross profit grew 2.4% from the year-ago value to $6.50 billion.

As of July 1, 2022, the company’s cash and cash equivalents came in at $8.98 billion, and its current assets stood at $23.14 billion. In addition, cash inflow from operating activities amounted to $4.55 billion.

Favorable Analyst Estimates

Analysts expect KO's revenue for the fiscal 2022 fourth quarter (ending December 2022) to come in at $9.83 billion, representing a rise of 3.8% year-over-year. The consensus EPS estimate of $0.47 for the ongoing quarter indicates a 4.4% year-over-year increase. The company has surpassed the consensus EPS estimates in each of the trailing four quarters.

The company’s revenue and EPS for the current fiscal year 2022 are expected to grow 9% and 6% year-over-year, respectively. Also, Street expects the company's EPS to grow 5% per annum over the next five years.

High Profitability

KO’s trailing-12-month gross profit margin of 58.89% is 79.4% higher than the 32.83% industry average. Its trailing-12-month EBITDA margin of 32.01% is 157.7% higher than the 12.42% industry average. Moreover, the stock’s trailing-12-month net income of 23.16% is 374.6% higher than the industry average of 4.88%.

Furthermore, KO’s trailing-12-month ROCE, ROTC, and ROTA of 42.30%, 11.09%, and 10.27% compare to the industry averages of 12.17%, 6.18%, and 4.63%, respectively.

POWR Ratings Show Promise

KO's overall B rating equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

KO has a grade of A for Quality, consistent with its higher-than-industry profitability ratios. In addition, it has a B grade for Stability. The stock’s beta of 0.60 justifies the Stability grade.

KO is ranked #19 out of 34 stocks in the A-rated Beverages industry.

Beyond what I have stated above, we have also given KO grades for Sentiment, Growth, Value, and Momentum. Get access to all KO ratings here.

Bottom Line

Consumer staple companies like KO perform relatively well during a recession due to their non-cyclical nature. The company’s stable business and solid earning streams make it a reliable dividend payer. It has a long history of paying dividends at an increasing rate.

Given KO’s robust financials, high profitability, attractive dividend, and solid growth prospects, we think it could be wise to buy the stock on the dip.

How Does Coca-Cola Company (KO) Stack Up Against its Peers?

KO has an overall POWR Rating of B. One could also check out these other stocks within the A-rated Beverages industry with an A (Strong Buy) rating: PepsiCo, Inc. (PEP), Kirin Holdings Company, Limited (KNBWY), and Suntory Beverage & Food Ltd (STBFY).

KO shares were trading at $56.04 per share on Wednesday afternoon, down $0.40 (-0.71%). Year-to-date, KO has declined -3.24%, versus a -21.68% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

More...