Coke (NYSE:KO) is often viewed as a safe blue chip stock. It owns the world’s leading soda brand, makes a lot of money and pays consistent dividends. But over the last 12 months the stock has fallen 3% S&P 500 increased by 23%.
Encouraged by the prospect of interest rate cuts, many investors flocked to the market’s higher-growth stocks rather than Coca-Cola. However, I believe it is actually the perfect time to buy Coca-Cola stock for five simple reasons.
1. It’s a dividend king
Coca-Cola has increased its dividend annually for 62 consecutive years. This puts it in the elite club of dividend kings, who have been increasing their payouts annually for at least 50 years. Only the best-run companies can stay in this club, as they must continually grow their earnings per share (EPS) and free cash flow (FCF), even during recessions, to support their rising dividends.
These annual dividend increases will also help its investors stay ahead of inflation while increasing their returns. If you had reinvested Coca-Cola’s dividends over the last 40 years, you would have achieved a total return of 13,340%.
2. The return becomes more attractive as interest rates fall
Coca Cola currently pays a decent dividend yield of 3.1%, but higher interest rates have pushed yields on CDs, T-bills and bonds above 5%. In this environment, many income investors are likely to stick with these safer fixed-income investments rather than buying Coca-Cola shares – which are riskier and offer lower returns.
Currently, unexpectedly hot inflation reports are dampening hopes for aggressive interest rate cuts this year. But in the long run, Coca-Cola’s returns are likely to become more attractive to income investors as interest rates fall again.
3. It will be a safe haven if interest rates remain high
On the other hand, if interest rates stay higher for longer than expected, Coca-Cola stock could become a safe haven again while higher-growth stocks slump. In a high interest rate environment, companies that make a lot of money – like Coca-Cola – become more attractive than the unprofitable and speculative ones.
Coca Cola’s annual FCF fell 15% to $9.5 billion in 2022 as the company deliberately increased its inventories to meet higher raw material prices. However, in 2023 it increased by 2% to $9.7 billion. The company spent $8 billion of its FCF on its dividend payments in 2023.
4. It still operates an evergreen business model
Coca-Cola may seem like a risky investment as soda consumption declines worldwide, but the company doesn’t just sell its namesake soda and other carbonated drinks. It also sells fruit juices, teas, energy drinks, coffee, sparkling water and alcoholic beverages, and has updated its flagship sodas with new flavors, healthier versions and smaller portion sizes.
This diversification allows Coca-Cola to generate stable growth regardless of macroeconomic conditions. In 2022, organic sales and comparable earnings per share increased 16% and 7%, respectively, although inflation and currency effects squeezed margins.
In 2023, Coca-Cola’s organic sales and comparable earnings per share increased 12% and 8%, respectively. In 2024, the company expects organic sales growth of 8-9%, while comparable earnings per share increase by 4-5%.
5. The value is still reasonable
Coca-Cola currently trades at 22 times expected earnings. PepsiCo trades at approximately the same multiple, while Nice Dr. pepper With a forward price-to-earnings ratio of 18, things look a little cheaper. However, Coca-Cola still pays a higher future dividend yield than PepsiCo (2.9%) and Keurig Dr. Pepper (2.6%).
Coca-Cola’s reasonable valuation and higher yield should limit the downside. It won’t take off anytime soon, but it should be a safe place to park your money as high interest rates, geopolitical conflicts and other macroeconomic headwinds rattle markets. That’s probably why Coca-Cola remains one of Warren Buffett’s top holdings Berkshire Hathawayand why its insiders have bought more shares than they have sold in the last three months.
Simply put, if you’re looking for an evergreen dividend stock that gradually rises without too much drama, you should buy this boring stock now, as the broader market remains torn between fixed income and growth investing.
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Leo Sun 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.
“5 Reasons to Buy Coca-Cola Stock Like There’s No Tomorrow” was originally published by The Motley Fool