This Warren Buffett favorite is the model of consistency.
There's a ton of evidence that The Coca-Cola Company (KO 1.55%) is a great business. It's one of the most well-known brands worldwide. It's paid and raised a dividend for over six consecutive decades. It's one of Warren Buffett's top holdings at Berkshire Hathaway. What's not to like?
Well, a great company isn't always a stellar investment. Sometimes, the money is made in investing when you buy, not when you sell. In other words, you can't mindlessly buy stock in a good company and automatically make money.
So, I've dug deep into Coca-Cola to determine whether the stock is poised to make you money today.
Here is what you need to know.
1. Coca-Cola possesses strong pricing power
Pricing power is a hallmark of a great business, and Coca-Cola has that in spades. The company recently reported first-quarter earnings, posting 3% net revenue growth bolstered by a 13% year-over-year pricing and product mix boost to compensate for slight volume declines, currency headwinds, and corporate adjustments.
Coca-Cola has multiple pricing levers. It can simply inch the price of its products higher by a penny or two at a time, and it can sneak price increases by selling smaller quantities at higher-per-fluid ounce prices that look like cost savings because their purchase price is technically smaller. For example, a 12-ounce can versus an eight-ounce can.
The strong U.S. dollar and geopolitical conflicts are real headwinds that would logically explain a downturn in Coca-Cola's business. Instead, the company consistently grows, even if it's not always by leaps and bounds. The company's consistency over generations is how it's been such a successful stock.
2. The famous dividend is safe and growing
Coca-Cola's dividends are a big reason for buying the stock. It offers the best of both worlds: a solid 3.1% starting dividend yield and steady growth, headlined by its 62 years of consecutive increases. Investors who reinvest the dividends and wait patiently have gotten the most out of Coca-Cola stock.
The dividend payout ratio is also solid, at 79% of cash flow. The business doesn't need much investment, as it primarily makes concentrates and syrups and works with an independent partner network for bottling and product distribution.
KO Cash Dividend Payout Ratio data by YCharts
The dividend has grown by an annual average of 3.5% over the past five years, which is a slow, steady, tortoise-like pace you can rely on. Analysts believe Coca-Cola will grow earnings by more than 6% annually over the next three to five years, so shareholders might see higher dividend growth moving forward.
3. Shares aren't a bargain today
The only downside to Coca-Cola stock is that overpaying for it can hurt your investment returns. While Coca-Cola is consistent, growing at a mid-single-digit pace makes your price critical because the company won't quickly outgrow a premium paid for the stock.
Today, Coca-Cola trades at roughly 22 times its expected 2024 earnings. That's a PEG ratio of over 3, assuming the company grows earnings at the 6% clip analysts anticipate. I generally like to buy stocks with PEG ratios around 1.5 or less.
One could argue that Coca-Cola's reputation and fundamentals earn the stock a premium. That may be warranted, but these valuations have no margin of safety.
Coca-Cola: Buy, sell, or hold?
The stock's valuation isn't so high that investors are doomed to years of no returns. So, I don't think investors holding the stock should necessarily sell their shares. However, it's hard to justify new money coming in and buying the stock at this price.
Instead, consider Coca-Cola stock a hold for now. Should the stock fall to a forward P/E in the 18-19 range, shares will look much more enticing.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
FAQs
The stock's valuation isn't so high that investors are doomed to years of no returns. So, I don't think investors holding the stock should necessarily sell their shares. However, it's hard to justify new money coming in and buying the stock at this price. Instead, consider Coca-Cola stock a hold for now.
Is Coca-Cola a buy hold or sell? ›
Coca-Cola has a consensus rating of Strong Buy which is based on 12 buy ratings, 3 hold ratings and 0 sell ratings.
Is now a good time to buy Coca-Cola shares? ›
The price cut
The weak performance of the stock in the past 12 months reduces the risk that you'll pay too high of a price for this company. Investors have to balance those positive factors against the likelihood that co*ke will report some softer sales trends in the short term.
Does Warren Buffett invest in Coca-Cola? ›
In 2023, Buffett wrote that Berkshire's $1.3 billion investment in co*ke, made from the late 1980s through the mid-1990s, has been justified by the dividend payments alone. co*ke paid an annual dividend of $704 million in 2022.
Is co*ke over or undervalued? ›
With its 3-star rating, we believe co*ke's stock is fairly valued compared with our long-term fair value estimate, which we maintain at $60 per share. Our fair value estimate implies a 22 times multiple against our adjusted 2024 earnings estimate and a 2023 enterprise value/adjusted EBITDA multiple of 19 times.
Is Coca-Cola stock expected to go up? ›
Stock Price Forecast
The 12 analysts with 12-month price forecasts for KO stock have an average target of 68.33, with a low estimate of 60 and a high estimate of 74. The average target predicts an increase of 8.58% from the current stock price of 62.93.
What is the 12 month forecast for Coca-Cola stock? ›
Based on analysts offering 12 month price targets for KO in the last 3 months. The average price target is $67.85 with a high estimate of $72 and a low estimate of $58.
Is it safe to invest in Coca-Cola? ›
Coca-Cola (KO 0.39%) is often considered a safe blue chip stock. It owns the world's top soda brand, it generates plenty of cash, and it pays consistent dividends.
How much dividend does Warren Buffett make from Coca-Cola? ›
A massive passive income stream
Berkshire currently owns 400 million shares of Coca-Cola. This means that on an annualized basis, Warren Buffett's company generates $736 million in dividend income from the beverage giant. That is a huge passive income stream that likely explains why Buffett isn't exiting the position.
Is Coca-Cola a good dividend stock? ›
In many ways for many investors, Coca-Cola (KO 1.55%) is a model dividend stock. The company is a Dividend King, meaning it has raised its shareholder payout at least once annually for a minimum of 50 years. Its current streak stands at a hard-to-conceive 62 straight years.
According to the latest TipRanks data, approximately 39.65% of the company's stock is held by institutional investors, 5.84% is held by insiders, and 37.68% is held by retail investors. Warren Buffett owns the most shares of Coca-Cola (KO).
Why invest in co*ke? ›
We believe co*ke has built a wide moat around its global beverage operations, based on strong intangible assets and a significant cost advantage that will let it deliver excess investment returns above its cost of capital over and beyond the next 20 years.
What price did Warren Buffett buy Apple? ›
Buffett began buying Apple in the first quarter of 2016, but there's no way to know exactly what his average share price was. But if you use the highest closing that quarter as a conservative estimate, it means that you would have paid $27.06 per share for Apple.
Who is Coca-Cola's biggest competitor? ›
The Coca-Cola Corporation, which has been around for over 130 years, and PepsiCo, with roots dating back to 1898, have been long-term competitors for ages. With its market value, the multinational food and beverage company PepsiCo directly follows Coca-Cola in the ranking of the largest companies in the world.
Is co*ke stock recession proof? ›
Coca-Cola Co.
(NYSE:KO) is one of the most popular recession-proof stocks in the U.S., with an attractive dividend payout history. The Dividend Aristocrat pays $1.84 in dividends annually, yielding 3.09% on its current price.
How much will Coca-Cola stock be worth in 5 years? ›
Coca-Cola stock price stood at $62.96
According to the latest long-term forecast, Coca-Cola price will hit $70 by the end of 2025 and then $80 by the end of 2027. Coca-Cola will rise to $90 within the year of 2028, $100 in 2029, $110 in 2030 and $125 in 2033.
What stocks are a strong buy right now? ›
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| Company (ticker) | Analysts' consensus recommendation score | Analysts' consensus recommendation |
|---|
| Microsoft (MSFT) | 1.33 | Strong Buy |
| Bio-Techne (TECH) | 1.39 | Strong Buy |
| Alexandria Real Estate Equities (ARE) | 1.39 | Strong Buy |
| Emerson Electric (EMR) | 1.39 | Strong Buy |
21 more rowsWalt Disney has 28.25% upside potential, based on the analysts' average price target. Is DIS a Buy, Sell or Hold? Walt Disney has a consensus rating of Strong Buy which is based on 20 buy ratings, 5 hold ratings and 0 sell ratings.
Is Coca-Cola prices going up? ›
And Coca Cola said that the increase in prices was 9% in the fourth quarter, which is more than what analysts expected. So pair that manners with Coca Cola reporting a volume increase of only 2%.
What is the fair value of Coca-Cola stock? ›
As of 2024-06-01, the Fair Value of Coca-Cola Co (KO) is 30.82 USD. This value is based on the Peter Lynch's Fair Value formula. With the current market price of 62.93 USD, the upside of Coca-Cola Co is -51%.
