This dividend king is trading at record highs. Is it too late to buy shares?

Established industry giants don’t usually buy exciting, over-the-top stocks. But the investors were lovely Coca-Cola (KO) this year. The beverage giant is up 21% year-to-date, beating… S&P500 and set new records along the way.

Is it too late to buy shares?

Model

Although Coca-Cola has been a long-time industry leader, it has been undergoing changes that have had a profound impact on the company. CEO James Quincey joined the board in 2018 when sales were declining and the company appeared to be losing ground. He also had to cope with the global pandemic and restructured the company to make the most effective use of its unrivaled distribution network. Coca-Cola reduced the number of brands by half (to about 200) and introduced drinks in new sizes and types of bottles. It has successfully raised prices to offset the effects of inflation and has grown its revenues and profits despite years of economic upheaval.

In the second quarter, revenues increased by 3% year-over-year and organic revenues by 15%. Operating margin increased from 20.1% a year ago to 21.3%, while adjusted operating margin increased from 21.6% to 32.8%.

Due to its size, reach and distribution channels, Coca-Cola has a model that promotes growth and efficiency. Although it divested half of its brands, they were mostly small, local names that accounted for a small portion of sales and volume. But it continues to acquire global brands that can scale, and since 2006, eight of its billion-dollar brands have come from acquisitions.

Once a new brand enters Coca-Cola’s distribution system, the company can use its vast troves of data to determine where it should go and use its robust channels to get products to the right places faster and cheaper than the brand could do on its own. This creates higher sales for Coca-Cola at a more profitable level.

Revenues finally reached record levels again after declining for several years prior to Quincey’s tenure. It makes sense that investors are excited about this business again.

Chance

In case investors are concerned about future growth, management says it is “very impressed” with the opportunities ahead. Although Coca-Cola is already the largest beverage company in the world, it is not the only player and sees significant potential in gaining market share. Even if Coca-Cola maintains its market share without increasing it, the industry has grown at about 5-6% annually over the past few years.

However, it plans to gain greater market share through a well-thought-out innovation strategy. It employs a three-pronged approach focusing on coffee brands, emerging brands and energy brands. This is in addition to core beverage brands such as Coca-Cola and regular ready-to-drink categories such as juices and dairy.

Management sees “limitless combinations” that can increase sales as it reaches global markets and creates new products at different price points.

Dividend

Coca-Cola pays a solid dividend, which is typically around 3%. At the current price, the company’s shares have a yield of 2.7%. It’s also a dividend king, having raised its dividend every year for 62 years and it’s been rock solid. Management paid and raised them under all circumstances for decades. Even during the pandemic, management said it was fully committed to paying the dividend, even though the payout ratio exceeded 100%.

Warren Buffett has praised Coca-Cola shares that he would never sell, and a high dividend is one of his markers for owning a great stock.

Stock

Although Coca-Cola shares are trading at near record highs, their price-to-earnings (P/E) ratio remains close to its five-year average. The rising share price doesn’t mean Coca-Cola’s valuation has become too expensive.

Data according to YCharts.

Coca-Cola may not offer the same opportunities as young growth companies, but it has plenty of opportunities to expand its reach while being a reliable source of passive income. If this fits your investment profile, it’s not too late to buy Coca-Cola stock.

Jennifer Saibil has no position in any of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.