Is there anyone in the world who does not know of The Coca-Cola Company (KO -0.19%)? Established in 1886, it has evolved from a local soda fountain syrup to a global beverage company famous for its iconic branding and distinctive taste. The stock went public in 1919, rewarded shareholders handsomely throughout the century, and started paying dividends in 1964.
Yet, recent times have been a bit frustrating for shareholders. Although the company is the global beverage leader, its stock has struggled over the past five years, severely underperforming the overall market. So, let's examine the stock and Coca-Cola's recent key financial metrics to evaluate whether it should be considered a buy, sell, or hold.
Coca-Cola has long been a favorite stock of Warren Buffett, who first bought shares through Berkshire Hathaway in 1988 and then over the next seven years for a total of $1.3 billion. Despite not reinvesting Coca-Cola's dividends, which amounted to a noteworthy $704 million in 2022 alone, Berkshire's ownership stake has risen.
This is as a result of Coca-Cola's strategic stock repurchases. To illustrate, Berkshire's 400 million shares (split adjusted), representing a 7.8% ownership stake in 1994, have expanded to 9.2% through share buybacks. Though Berkshire Hathaway hasn't acquired more shares since 1994, Buffett has emphatically declared that he will never sell a single share of the stock.
Berkshire Hathaway's investment illustrates that Coca-Cola is dedicated to returning capital to shareholders. It has paid and raised its dividend annually for 61 consecutive years. Today, the beverage behemoth pays a quarterly dividend of $0.46 per share, representing an impressive annual yield of roughly 3.2%.
And management has lowered the company's outstanding share count by 16% since 1994, which, as exemplified in Berkshire's case, is a tax-efficient way of increasing a shareholder's ownership stake.
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What could go wrong for Coca-Cola?
Before considering any investment, an investor should consider the bear case to determine possible risks. For Coca-Cola, the company's commitment to returning capital to shareholders is also one of its most significant risks.
For dividend-paying companies like Coca-Cola, the payout ratio (annual dividend payments divided by annual earnings) is an important metric to monitor to ensure the company can afford to maintain and potentially raise its payout. Generally, any payout ratio higher than 75% should give an investor pause. With a payout ratio of about 72%, Coca-Cola could struggle to raise its dividend if earnings stagnate.
The company has lowered its share count over the past few decades, but management has struggled to make meaningful inroads in recent years. That's because Coca-Cola's current share-repurchase program is aimed at offsetting dilution resulting from employee stock-based compensation plans rather than previous programs that succeeded in drastically lowering its outstanding shares.
To illustrate, the outstanding share count is actually up 1.3% over the past five years, but management lowered it by 0.1% in 2023 with its new goal. All together, Coca-Cola will be spending roughly $8 billion on dividends in 2023 and has already allocated $1 billion in share repurchases through September for a total of at least $9 billion.
Considering that the company expects to generate $9.5 billion in free cash flow for 2023, there isn't much room left for paying down its $25 billion in net debt (total debt minus cash and cash equivalents), which is becoming more expensive to service as interest rates stay elevated.
And the company has an unsettled $3.4 billion tax debt for the years 2007 to 2009, as the beverage company allegedly limited its royalty income in the U.S. The ongoing litigation has it disputing the Internal Revenue Service's action and the latest decision by the U.S. Tax Court, calling the amended calculation methodology "unconstitutional."
What could go right for Coca-Cola?
For mature companies like Coca-Cola, a revenue plateau is inevitable. The company's high-water mark occurred in 2012, with $48 billion in net revenue. That key metric was in free fall until 2022 and now finally appears to be reversing course.
Specifically, the beverage company's revenue bottomed out in 2020 at $33 billion, before increasing to $38.6 billion in 2021 and $43 billion in 2022.
Management expects its organic revenue (excluding currency fluctuations and recent acquisitions, divestitures, and structural changes) to grow 10% to 11% in 2023 compared to 2022. For its most recently reported quarter, it pointed to a 2% volume increase and price hikes for the strong growth.
Earnings per share (EPS) also appear to be growing again. The company generated a diluted EPS of $2.01 through the first three quarters of 2023, up 17% year over year. And management expects EPS to grow 13% to 14% on a currency-neutral basis for the full-year 2023 compared to 2022.
Nonetheless, the stock has some red flags, as outlined here, which is perhaps why Berkshire Hathaway hasn't purchased anymore shares since 1994. All in all, Coca-Cola is still a good stock to hold for dividend-seeking investors since management will likely continue to prioritize returning capital to shareholders, given its history.
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 stock a Buy, Sell or Hold? Coca-Cola stock has received a consensus rating of buy. The average rating score is A1 and is based on 38 buy ratings, 6 hold ratings, and 0 sell ratings.
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.
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 enable the company to deliver excess investment returns above its cost of capital over and beyond the next 20 years.
Valuation metrics show that CocaCola Company (The) may be overvalued. Its Value Score of D indicates it would be a bad pick for value investors. The financial health and growth prospects of KO, demonstrate its potential to underperform the market. It currently has a Growth Score of D.
For investors looking for stock ideas and actionable guidance, Motley Fool is likely worth the reasonable annual fees. The stock research alone can pay for the membership cost if you invest in just a couple successful picks. However, more advanced investors doing their own analysis may not find sufficient value-add.
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In 2023, Coca-Cola's organic sales and comparable EPS rose 12% and 8%, respectively. In 2024, it expects its organic sales to grow 8%-9% as its comparable EPS rises 4%-5%.
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.
The average price target for Coca-Cola is $67.85. This is based on 14 Wall Streets Analysts 12-month price targets, issued in the past 3 months. The highest analyst price target is $72.00 ,the lowest forecast is $58.00. The average price target represents 9.97% Increase from the current price of $61.7.
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.
You would have more than doubled your money, with a total investment worth of $2,029.55. That's a 103% return, or a 7.23% annual rate of return. Interestingly, despite co*ke's dominance on the world stage, investing in co*ke's main rival, Pepsi, 10 years ago would have given you more pop for your buck.
With its 3-star rating, we believe co*ke's stock is fairly valued compared with our long-term fair value estimate of $60 per share, which implies a 22 times multiple against our adjusted 2024 earnings estimate and a 2024 enterprise value/adjusted EBITDA multiple of 20 times.
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.
Coca-Cola stock would need to gain 58.82% to reach $100. According to our Coca-Cola stock forecast, the price of Coca-Cola stock will not reach $100. The highest expected price our algorithm estimates is $ 72.77 by Sep 8, 2024.
According to the latest long-term forecast, Coca-Cola price will hit $65 by the end of 2024 and then $70 by the end of 2025. Coca-Cola will rise to $75 within the year of 2027, $85 in 2028, $95 in 2029, $100 in 2030, $110 in 2031 and $125 in 2034.
Introduction: My name is Aron Pacocha, I am a happy, tasty, innocent, proud, talented, courageous, magnificent person who loves writing and wants to share my knowledge and understanding with you.
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