Coca-Cola Stocks: Buy, Sell or Hold?

Coca cola (NYSE:KO) is one of the most iconic and longest-running 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 closer look at Warren Buffett’s favorite. Let’s take a look at Coca-Cola’s recent financial performance, dividend history, and what the future holds to determine whether it’s worth buying, selling, or holding the stock.

Coca-Cola’s Not-So-Secret Formula

Everyone knows Coca-Cola for its flagship product, but the company has been investing heavily in diversifying its offerings as some consumers move away from sugary soft drinks. Notable acquisitions in the past decade include sparkling water brand Topo Chico for $220 million, coffee maker Costa for $4.9 billion and sports and hydration drink maker BodyArmor for $5.6 billion.

These acquisitions have helped the company effectively stabilize its net sales, which fell from a peak of $48 billion in 2012 to a trough of $33 billion in 2020. In 2023, Coca-Cola will generate nearly $46 billion in revenue.

Coca-Cola recently reported first-quarter 2024 net sales of $11.4 billion, up 3% year over year. The company translated its net sales into cash flow from operating activities of $528 million, up 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 operating cash flow of $11.4 billion, down slightly from $11.6 billion in 2023.

Coca-Cola focuses on dividends

Companies have two main methods of returning capital to shareholders: dividends and share repurchases. In the case of Coca-Cola, management’s priority is to pay and increase the dividend each year. The stock is a member of the exclusive club of Dividend Kings because it has paid and increased dividends for at least 50 consecutive years.

Now in its 62nd consecutive year of dividend increases, Coca-Cola pays a quarterly dividend of $0.485 per share, which equates to an annual yield of 3%. S&P 500 With a yield of around 1.3%, shares of this beverage giant are popular among income seekers.

To illustrate the potential of Coca-Cola’s dividends for long-term investors, consider: Berkshire Hathawayinvestment in the company. Berkshire’s total investments reached $1.3 billion in 1994 and received $75 million in dividends. Without the need to purchase additional shares and reinvest dividends, Berkshire is expected to receive $776 million in 2024. In Warren Buffett’s annual letter to shareholders for 2022, he wrote: “The increase has occurred every year, as have birthdays.[…]We expect these controls will likely increase.”

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What could go wrong for Coca-Cola?

While Coca-Cola’s steadily growing dividend is one of its strengths, it also poses potential risks. For any dividend stock, it is necessary to measure earnings and compare them to dividends paid to determine whether the company can continue to pay dividends to shareholders. In Coca-Cola’s case, the company is expected to pay approximately $8.4 billion in dividends through 2024, while generating an expected $9.2 billion in free cash flow.

As a result, the costs leave little for the company to service the $25.6 billion in net debt on which it spends more than $550 million annually. While the dividend is not at risk of being suspended or cut, management will likely feel obligated to increase it annually. If sales of its flagship sugary soft drinks continue to decline, it could potentially put additional pressure on its balance sheet, which could in turn make future growth acquisitions more difficult.

Speaking of acquisitions, Coca-Cola had to write down $760 million last quarter on its $4.9 billion acquisition of BodyArmor. During the company’s recent earnings call, CEO James Quincy admitted, “It’s clear that we haven’t made progress as quickly as we would like with BodyArmor.”

Finally, Coca-Cola is in the middle of an ongoing lawsuit with the Internal Revenue Service (IRS), which claims the company owes $3.4 billion in unpaid taxes for 2007-2009. The IRS claims that Coca-Cola unfairly limited its royalty income in the United States during this period.

Is it worth buying, holding or selling Coca-Cola shares?

Coca-Cola trades at 27.6 times free cash flow, which is the five-year median. So you could say the stock is neither cheap nor expensive, despite near-record highs.

For investors looking for stability and income, Coca-Cola remains an attractive option and should continue to hold the stock. However, investors must continue to monitor the company’s challenges, including changing consumer preferences and revenue growth, to ensure the dividend continues to grow.

Is it worth investing $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 shares: buy, sell or hold? was originally published by The Motley Fool