Coca-Cola stock: dividend king with valuation concerns

Coca-Cola (NYSE: KO) stock price has been one of the best performers in Wall Street in the last decades. It is an all-weather company that has survived the world’s extreme events like the COVID-19 pandemic, the Global Financial Crisis, and the two World Wars.

However, the company, which counts Warren Buffett as a big investor, has underperformed the market in the last decade. Its total return in the past five years stood at 54% while the S&P 500 index has risen by over 94%. 

The stock has, nonetheless, done well this year, rising by 24.3%, while the S&P 500 index has risen by 20%.

Strong revenue and profitability growth

Coca-Cola is a well-known brand that has continued to grow its revenues, profitability, and rewarding its shareholders. A dividend king, it has boosted its dividends for over 61 years, a record only a few companies have done. 

Coca-Cola’s annual revenues have continued to grow, thanks to the world’s population and economic growth. In most periods, the company is widely seen as a good barometer of the global economic growth.

Most recently, its annual revenue has jumped from over $37 billion in 2019 to over $45 billion in the last financial year. 

Analysts expect that its business will continue to do well in the coming years. Its revenue will rise to $46 billion in 2024, followed by $48.2 in 2025. Also, analysts believe that its earnings per share will rise from $2.85 this year to $3.04 in the following year. 

This profitability growth has happened even after the company went through major inflationary pressures globally.

Coca-Cola is also known for its fairly good balance sheet. It has $19 billion in cash and short-term investments against $39 billion in long-term debt. While this is a big debt burden, its maturities are spread well over a long period.

Earnings download

The most recent financial results showed that Coca-Cola’s revenue growth continued in the last quarter. 

Its second-quarter revenue rose by 3% to $12.4 billion, helped by higher prices and substantial volume increase. 

Coca-Cola also continued to grow its margins, with the operating margin coming in at 21.3%, higher than the previous 20.1%.

Another positive is that the firm continued to grow its market share in the nonalcoholic ready-to-drink industry, where its primary competitor is PepsiCo. The company expects that its full-year revenue growth will be between 9% and 10% this year.

Still, it faces several major headwinds that could affect its reported growth. One of the top headwinds is that the US dollar has retreated substantially against key currencies like the euro and sterling this year. As a result, it expects to have a currency impact of between 5% and 6%.

Valuation concerns remain

Coca-Cola is a great company with one of the best market shares in the beverage industry. Over the years, it has learnt to co-exist with Pepsi, its biggest competitor. 

However, the main concern among investors is that its valuation has remained at an elevated level in the past few months.

Its non-GAAP price-to-earnings ratio stands at 25.7, higher than the sector median of 18, and higher than its five-year average of 24.65. 

Coca-Cola’s forward P/E of 27 is also higher than the S&P 500’s 21 and the industry median of 20. It is also slightly higher than its five-year average of 25.

Companies with premium brands like Moody’s, Visa, Mastercard, and American Express always trade at a higher valuation. However, in Coca-Cola’s case, the challenge is that the revenue and profitability growth has not been all that strong.

Analysts are also seeing a limited chance for growth, with the average stock estimate being at $71.93, in par with the current price.

Coca-Cola stock price analysis

KO chart by TradingView

The weekly chart shows that the KO share price has been in a strong bull run this year. It crossed the important resistance point at $61.82, its highest swing in April, December 2022, and April 2023. By moving above that level, it invalidated the triple-top pattern that was forming.

The stock has remained above the 50-week and 200-week Exponential Moving Averages (EMA) and formed a bullish pennant pattern. In most periods, this pattern is usually followed by a bullish breakout.

Coca-Cola shares have become severely overbought, with the Relative Strength Index (RSI) moving to 75. Therefore, while the bullish trend may continue, a bearish breakout towards $61.82 cannot be ruled out. The next key date to watch will be on Oct. 23 when it publishes its financial results.

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