Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors are currently grappling with uncertainty regarding the long-term viability of Coca-Cola as an investment. While this beverage giant unquestionably dominates its industry and boasts impressive profit margins, shifting consumer preferences away from sodas indicate that Coca-Cola's era of robust growth may be a thing of the past.
To gain a better understanding, let's explore the primary arguments in favor of and against this widely-held dividend powerhouse.
First and foremost, Coca-Cola checks most of the boxes that investors typically consider when evaluating a core stock holding. Qualitative factors, such as its invaluable brand, evident competitive advantages, and a lengthy history of sustained growth, harmonize with strong financial metrics encompassing robust cash flow, profitability, and a consistent track record of dividend increases, rendering it an enticing choice.
Admittedly, Coca-Cola is unlikely to dazzle investors with rapid growth. Even its most recent 11% organic sales increase was predominantly driven by higher prices, with volume remaining stagnant. Nevertheless, Coca-Cola has the potential to generate remarkable returns, even in the face of subdued demand trends.
The company leads its industry in profitability, with operating income expanding to 32% of sales in the second quarter. In the first half of 2023, free cash flow reached $4 billion, roughly on par with the prior year's record results.
These financial achievements provide Coca-Cola's management with ample resources to invest in supporting its brands through marketing and innovation. Additionally, they augur well for shareholders, as it is highly likely that Coca-Cola will continue its streak of annual dividend increases, targeting its 61st consecutive increase in 2024.
At first glance, Coca-Cola appears to be the quintessential stock that would seamlessly fit into virtually any investment portfolio. It's a Dividend King, with an impressive streak of raising dividends for over 50 years. It boasts ownership of some of the world's most valuable brands and holds the distinction of being a long-standing favorite of Warren Buffett, whose Berkshire Hathaway firm has maintained a stake in the company for an impressive 35 years.
However, a closer examination reveals that Coca-Cola is no longer the formidable force it was throughout much of the 20th century. Soda sales in the United States peaked in 2004 and have since been on a steep decline, particularly on a per-capita basis, driven by health concerns that have prompted consumers to switch to alternative beverages. Even diet sodas have not been immune to this trend, with sales in this category, a significant cash generator for the industry, falling at an even more rapid pace than regular soda.
Coca-Cola has attempted to offset these challenges in part by introducing smaller packaging sizes, raising prices, and diversifying beyond its core soda business, such as through the acquisition of the Costa Coffee chain. Nevertheless, these efforts have not been sufficient to position the stock as a winner.
Over the past decade, the S&P 500 has clearly outperformed Coca-Cola in terms of price appreciation and total returns.
Lastly, while consumer staples stocks like Coca-Cola have generally thrived in the current economic environment, given the resilience of sales in groceries and essential products, the same cannot be said for Coca-Cola. Even during this favorable context, Coca-Cola has had a less-than-impressive year. If it struggles to outperform in such a climate, it appears less likely to do so when investors regain confidence in an economic recovery and growth stocks come back into favor.
As long as the price is below 55.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 53.33
- Take Profit 1: 51.00
- Take Profit 2: 48.00
Alternative scenario:
If the level of 55.00 is broken-out , follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 55.00
- Take Profit 1: 57.00
- Take Profit 2: 59.00
