Coca Cola (NYSE: KO) is one of the most iconic and longest-standing companies on the stock market. As such, it’s easy to forget about the $275 billion beverage giant.
Today, Coca-Cola shares are about 4% below their all-time high, so it’s worth taking a look at the Warren Buffett favorite. Let’s examine Coca-Cola’s recent financials, dividend history, and what the future holds to determine if it’s worth buying, selling, or holding.
The Not So Secret Formula of Coca-Cola
Everyone knows Coca-Cola for its flagship product, but the company is investing heavily in diversifying its offering as some consumers move away from sugary soft drinks. In the past decade, notable acquisitions 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 successfully stabilized its net sales, which plummeted 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 posted net sales of $11.4 billion in the first quarter of 2024, up 3% year over year. The company converted its net sales into cash flow from operations of $528 million, representing an increase of 43.5% year over year.
For the full year 2024, management forecasts organic sales growth of 8% to 9% compared to 2024, excluding or adjusting for the impact of acquisitions, divestitures and structural changes. Management also projected cash flow from operations of $11.4 billion, down slightly from $11.6 billion in 2023.
Coca-Cola prioritizes dividends
Companies have two primary methods of returning capital to shareholders: dividends and share repurchases. For Coca-Cola, management’s priority is to pay and increase the dividend annually. The shares are in the exclusive Dividend Kings club, having paid and increased dividends for at least 50 consecutive years.
Now in its 62nd year of consecutive dividend increases, Coca-Cola pays a quarterly dividend of $0.485 per share, which equates to an annual yield of 3%. Given the S&P 500 With a yield of around 1.3%, the drinks giant is a popular stock for income seekers.
To illustrate the power of Coca-Cola’s dividends for long-term investors, consider: Berkshire Hathaway‘s investment in the company. Berkshire’s total investment reached $1.3 billion in 1994 and received $75 million in dividends. Without buying additional shares or reinvesting dividends, Berkshire is expected to receive $776 million in 2024. In Warren Buffett’s 2022 annual shareholder letter, he wrote: “Growth happened every year, as surely as birthdays. … We expect that those checks will very likely grow.”
What could go wrong for Coca-Cola?
While Coca-Cola’s consistently growing dividend is one of its selling points, it’s also a potential risk. For any dividend stock, it is essential to measure its earnings and compare them to dividends paid to determine whether the company can continue to pay dividends to shareholders. In the case of Coca-Cola, the company is expected to pay out approximately $8.4 billion in dividends through 2024, while generating an expected $9.2 billion in free cash flow.
The resulting expenses don’t leave much for the company to service its $25.6 billion in net debt, which it spends more than $550 million annually to service. While the dividend is not in danger of being suspended or cut, management will likely feel obliged to increase it annually. If sales of its flagship sugary soft drinks continue to falter, it could potentially put further pressure on its balance sheet, which could in turn hinder future growth acquisitions.
Speaking of acquisitions, Coca-Cola had to write down $760 million last quarter on its $4.9 billion BodyArmor acquisition. During the company’s last earnings call, CEO James Quincy acknowledged, “Clearly, we haven’t progressed as quickly as we would like on BodyArmor.”
Finally, Coca-Cola is in the midst of an ongoing lawsuit 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 alleges that Coca-Cola improperly limited its royalty income in the United States during this period.
Is it wise to buy, hold or sell Coca-Cola shares?
Coca-Cola trades at 27.6 times free cash flow, which corresponds to the five-year median. So, you could say the stock is neither cheap nor expensive, despite near-all-time highs.
For investors looking for stability and income, Coca-Cola remains an attractive option, and they should continue to hold the stock. However, investors must continually monitor the company’s challenges, including changing consumer preferences and revenue growth, to ensure the rising dividend can be maintained.
Should You Invest $1,000 in Coca-Cola Now?
Before you buy Coca-Cola stock, you should consider the following:
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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 Stocks: Buy, Sell or Hold? was originally published by The Motley Fool
