Source: PaxForex Premium Analytics Portal, Fundamental Insight
There's ample evidence supporting The Coca-Cola Company as a formidable business entity. It stands as one of the most recognizable brands globally, boasting a track record of consistent dividend payments and increases spanning over six decades. Moreover, it holds a prominent position among Warren Buffett's premier holdings in Berkshire Hathaway. On the surface, it seems like an investment dream come true.
However, the correlation between a great company and a lucrative investment isn't always straightforward. Often, the key to successful investing lies in the timing of purchase rather than the eventual sale. Simply put, buying stock in a reputable company doesn't guarantee automatic profits.
With that in mind, we've conducted a thorough analysis of Coca-Cola to assess its potential as a wealth-building opportunity in today's market.
Here's what you need to know.
Coca-Cola Demonstrates Robust Pricing Power
Strong pricing power is a defining characteristic of a resilient business, and Coca-Cola exemplifies this trait. In its recent first-quarter earnings report, the company showcased a 3% increase in net revenue, driven by an impressive 13% surge in pricing and product mix compared to the previous year. This substantial boost helped offset minor declines in volume, currency challenges, and corporate adjustments, underscoring Coca-Cola's ability to maintain profitability amidst varying market conditions.
Coca-Cola employs various pricing strategies to bolster its revenue streams. It has the flexibility to incrementally raise product prices by small margins, such as a penny or two, or adopt tactics like offering smaller quantities at higher per-fluid ounce prices, creating an illusion of cost savings despite technically paying a smaller purchase price. For instance, comparing a 12-ounce can to an eight-ounce can illustrates this pricing strategy in action.
Despite facing significant challenges like the strength of the US dollar and geopolitical tensions, which could logically impede its business growth, Coca-Cola consistently demonstrates resilience. While its growth may not always be meteoric, the company's sustained performance across generations underscores its status as a dependable investment option.
Coca-Cola's Iconic Dividend Endures and Expands
Coca-Cola's dividend track record stands as a compelling reason to invest in the stock. It offers investors the best of both worlds: an attractive starting dividend yield of 3.1% and a history of steady growth, highlighted by an impressive 62 consecutive years of dividend increases. Those who reinvest dividends and exercise patience have reaped substantial benefits from holding Coca-Cola stock.
Moreover, the dividend payout ratio remains robust, standing at 79% of cash flow. Given its business model primarily focused on concentrates and syrups production, coupled with a network of independent bottling and distribution partners, Coca-Cola requires minimal capital investment, further solidifying the safety and sustainability of its dividend payouts.
The dividend has exhibited a consistent growth pattern, averaging an annual increase of 3.5% over the past five years, reflecting a reliable, methodical, and dependable trajectory. Analysts anticipate that Coca-Cola's earnings will expand by more than 6% annually over the next three to five years, suggesting the potential for accelerated dividend growth in the future.
Current Valuations Suggest Caution
While Coca-Cola's track record of consistency is commendable, it's essential to be mindful of the price you pay for its shares, as overvaluation can dampen investment returns. Despite its steady growth, Coca-Cola's mid-single-digit pace means that the price you pay for the stock is crucial, as the company is unlikely to quickly outgrow a premium valuation.
Presently, Coca-Cola is trading at approximately 22 times its anticipated 2024 earnings, translating to a PEG ratio exceeding 3, assuming a 6% earnings growth rate, as forecasted by analysts. Typically, the majority favor stocks with PEG ratios around 1.5 or lower.
While some argue that Coca-Cola's strong reputation and fundamental strength justify a premium valuation, it's essential to recognize that such valuations leave little room for error or margin of safety.
While the current valuation doesn't imply imminent negative returns for investors, it may not present an attractive entry point for new investments. Therefore, investors currently holding Coca-Cola stock may opt to retain their shares. However, prospective investors might consider waiting for a more opportune entry point. If the stock were to decline to a forward P/E ratio in the 18-19 range, it would likely present a more compelling investment opportunity.
As long as the price is above 59.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 62.78
- Take Profit 1: 64.00
- Take Profit 2: 66.00
Alternative scenario:
If the level of 59.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 59.00
- Take Profit 1: 58.00
- Take Profit 2: 57.00
