Coca-Cola | Fundamental Analysis

Coca-Cola is a cornerstone of the stock market, renowned for its enduring presence, yet its substantial $275 billion valuation can sometimes obscure its significance.

Presently, Coca-Cola's stock trades approximately 4% below its peak, prompting a closer examination of Warren Buffett's favored investment. Let's delve into Coca-Cola's recent financial performance, dividend track record, and future prospects to assess its suitability as a buy, sell, or hold.

While Coca-Cola is synonymous with its flagship soda, the company has diversified its portfolio in response to evolving consumer preferences away from sugary beverages. Over the past decade, it has executed strategic acquisitions, including Topo Chico sparkling water for $220 million, Costa coffee for $4.9 billion, and BodyArmor sports drink for $5.6 billion.

These strategic maneuvers have stabilized Coca-Cola's net sales, which declined from a peak of $48 billion in 2012 to $33 billion in 2020, rebounding to nearly $46 billion by 2023.

In the first quarter of 2024, Coca-Cola reported $11.4 billion in net sales, a 3% year-over-year increase. Cash flow from operations also surged by 43.5% to $528 million compared to the previous year.

Looking forward, Coca-Cola's management anticipates organic revenue growth of 8% to 9% for 2024, excluding acquisitions, divestitures, and structural changes. They also project $11.4 billion in cash flow from operations, slightly down from $11.6 billion in 2023.

While Coca-Cola's consistent dividend growth is a strong attraction, it also presents risks. Evaluating its earnings against dividend payouts is crucial for sustainability. For 2024, Coca-Cola expects to pay out about $8.4 billion in dividends against projected free cash flow of $9.2 billion.

These cash commitments leave little room for debt reduction, with net debt standing at $25.6 billion, requiring over $550 million annually for servicing. Although the dividend is secure, annual increases could strain finances if flagship soda sales decline, potentially impacting the balance sheet and future acquisitions.

Regarding acquisitions, Coca-Cola recorded a $760 million write-down on its $4.9 billion BodyArmor acquisition in the latest quarter. During the earnings call, CEO James Quincey acknowledged challenges: "We haven't progressed as fast as we would like with BodyArmor."

Additionally, Coca-Cola faces ongoing litigation with the IRS, contesting $3.4 billion in unpaid taxes from 2007 to 2009, alleging improper income reporting within the United States.

Companies typically return capital through dividends and buybacks. Coca-Cola focuses on annual dividend growth as a Dividend King, having raised dividends for over 50 consecutive years.

Currently, in its 62nd year of increases, Coca-Cola offers a quarterly dividend of $0.485 per share, yielding 3% annually, notably above the S&P 500's average of approximately 1.3%, appealing to income-oriented investors.

Highlighting Coca-Cola's dividend longevity, consider Berkshire Hathaway's 1994 $1.3 billion investment, yielding $75 million in dividends. Without further investments, Berkshire expects $776 million in 2024 dividends. Warren Buffett noted in 2022: "Growth occurred annually, akin to birthdays... We anticipate these checks will likely grow."

Trading at 27.6 times free cash flow, aligning with its five-year median, Coca-Cola appears fairly valued, neither undervalued nor overpriced, despite nearing all-time highs.

For stability and dependable income, Coca-Cola remains a robust choice. Vigilance is crucial amid evolving consumer trends and revenue challenges to sustain dividend growth.