Coca-Cola (NYSE: KO) is one of the most iconic and longest-running companies in the public market, so it’s easy to overlook this $275 billion beverage giant.
Today, Coca-Cola stock is about 4% off its all-time high, so it’s worth checking how things are going. Warren Buffett-preferred. Let’s look at Coca-Cola’s recent financials, dividend history, and what the future holds to determine if it’s worth buying, selling, or holding.
Coca-Cola’s not-so-secret formula
Everyone knows Coca-Cola for its flagship product, but the company has invested heavily in diversifying its offerings as some consumers move away from sugary sodas. Notable acquisitions over the past decade include sparkling water brand Topo Chico for $220 million, coffee company Costa for $4.9 billion and sports and hydration drink company BodyArmor for $5.6 billion.
Thanks to these acquisitions, the company has managed to stabilize its net saleswhich fell from a peak of $48 billion in 2012 to a low of $33 billion in 2020. In 2023, Coca-Cola generated nearly $46 billion in revenue.
More recently, Coca-Cola reported net sales of $11.4 billion in the first quarter of 2024, an increase of 3% year over year. The company translated its net sales into operating cash flow of $528 million, which is equivalent to an increase of 43.5% year over year.
For the full year 2024, management forecasts organic revenue growth of 8-9% compared to 2024, which excludes or adjusts for the impact of acquisitions, divestitures and structural changes. Management also projects operating cash flow of $11.4 billion, down slightly from 2023’s $11.6 billion.
Coca-Cola prioritizes dividends
Companies have two main methods of returning capital to shareholders: dividends and stock buybacks. For Coca-Cola, management’s priority is to pay and increase its dividend every year. The stock is part of the exclusive Dividend Kings club, having paid and increased its dividend for at least 50 consecutive years.
Coca-Cola, which is in its 62nd consecutive year of dividend increases, pays a quarterly dividend of $0.485 per share, which gives an annual yield of 3%. Considering the S&P500 With a yield of around 1.3%, the beverage giant is a favorite stock for income seekers.
To illustrate the power of Coca-Cola’s dividends for long-term investors, consider Berkshire HathawayBerkshire’s investment in the company. Berkshire’s total investment reached $1.3 billion in 1994 and received $75 million in dividends. Without purchasing additional shares or reinvesting dividends, Berkshire is expected to receive $776 million in 2024. In Warren Buffett’s 2022 annual letter to shareholders, he wrote: “Growth has occurred every year, as certain as birthdays. … We expect those checks to increase most likely. »
What could go wrong for Coca-Cola?
While Coca-Cola’s consistent dividend growth is one of its selling points, it also poses a potential risk. For any dividend stock, it is essential to measure its earnings and compare them to the dividends paid to determine whether it can continue to afford to distribute dividends to shareholders. In Coca-Cola’s case, the company is expected to pay out approximately $8.4 billion in dividends for 2024 while generating a projected free cash flow of $9.2 billion.
The resulting cash outflows don’t leave much room for the company to pay down its $25.6 billion net debt, which it spends more than $550 million a year to service. Although the dividend is not under threat of suspension or reduction, management will likely feel obligated to increase it every year. If sales of its flagship sodas continue to weaken, that could potentially put additional pressure on its balance sheet, which could in turn hamper future growth acquisitions.
Speaking of acquisitions, Coca-Cola had to write down $760 million on its $4.9 billion acquisition of BodyArmor during the most recent quarter. During the most recent earnings conference call, CEO James Quincy acknowledged, “Clearly, we haven’t progressed as quickly as we would like on BodyArmor.” »
Finally, Coca-Cola finds itself in an ongoing dispute with the Internal Revenue Service (IRS), which alleges that the company owes $3.4 billion in unpaid taxes for the years 2007 through 2009. The IRS claims that Coca-Cola improperly limited its royalty income in the United States during that period.
Is Coca-Cola Stock a Buy, Hold, or Sell?
Coca-Cola trades at 27.6 times its free cash flow, which is in line with its five-year median. Thus, it can be argued that the stock is neither cheap nor expensive despite its near-all-time highs.
For investors looking for stability and income, Coca-Cola remains an attractive option and they should continue to hold this stock. However, investors should continually monitor the company’s challenges, including changing consumer preferences and revenue growth, to ensure it can maintain its growing dividend.
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Collin Brantmeyer has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Coca-Cola Stock: Buy, Sell or Hold? was originally published by The Motley Fool
