Rising macroeconomic headwinds and geopolitical tensions have investors on edge lately, and stocks have struggled as a result. In environments like this one, passive-income stocks that provide a consistent income stream can serve as a safe haven. And what's better than “Dividend Kings”? These are an elite group of S&P 500 Index ($SPX) companies that have increased their dividends for at least 50 consecutive years.
Among this group, beverage giant Coca-Cola (KO) has paid and hiked its dividends consistently over the last 61 years, reflecting the stability of its operations. Concerns about rising inflation affecting consumer spending appear to have had little impact on Coca-Cola's business. Despite high prices, it just reported another quarter of robust growth in revenue and profits.
Coca-Cola’s stock has dipped nearly 11% year-to-date, versus the S&P 500’s gain of 7.6%. Nevertheless, Wall Street analysts recommend the stock as a “strong buy.” Let’s find out why.
Brand Loyalty Reflects in Another Strong Quarter
Coca-Cola's ability to generate substantial revenue is a key factor in maintaining its status as a Dividend King. Its iconic brands, such as Coca-Cola, Diet Coke, Fanta, and Sprite, are enjoyed in every corner of the globe. This brand strength has led to its market dominance in the beverage industry. As a result, the company has gained pricing power and customer loyalty, both of which are key to sustaining its financial performance.
Coca-Cola is also Warren Buffett’s longest-held stock. Coke’s strategic investments in marketing, distribution, and innovation keep its products in demand and its cash registers ringing. Moreover, Coke has diversified its portfolio to include non-carbonated and healthier options to adapt to consumer’s changing preferences.
Despite the company’s price hikes, its customer loyalty paid off. It kicked off the third quarter with an 8% year-over-year revenue increase to $12 billion. That number beat consensus estimates by $489 million, while EPS surpassed estimates by $0.02. Net earnings per share (EPS) increased by 9% for the quarter to $0.71. In the third quarter, the average selling price grew 9%, while its unit case volume jumped 2%. Unit case volume is the number of unit cases of products the company sells directly or indirectly to its consumers.
Coca-Cola's pricing power is its moat, allowing it to keep profit margins stable. Because of its brand loyalty, the company can afford to raise prices to offset rising raw material costs. Management highlighted in the Q3 earnings call that the company saw consumer strength across Latin America, India, and certain regions of Central and Southeast Asia in the quarter.
Management looks forward to another promising year with steady growth in revenue and earnings, and raised its outlook for the full year. Coke anticipates organic revenue growth of 10% to 11%, and EPS growth of 7% to 8% versus 2022.
Meanwhile, analysts foresee revenue growth of 5.3% year-over-year to $45.3 billion, and EPS growth of 8% to $2.68 per share for 2023.
Coca-Cola Is Likely To Sustain Its “Dividend King” Status
Generating steady, positive free cash flow is essential to consistently paying and raising dividends. Coke expects to bring in $9.5 billion in free cash flow for the entire year, allowing it to continue paying dividends while also aiding growth strategies for the year ahead.
Coca-Cola offers an attractive dividend yield of 3.3%, which is significantly higher than the S&P 500’s average of 1.6%.
What's the Price Target for Coca-Cola Stock?
Despite the stock's price dip this year, Wall Street maintains a bullish stance for KO. After the upbeat Q3 results, analysts at Wells Fargo and Barclays raised their respective target prices for KO.
Out of the 14 analysts covering Coca-Cola stock, 11 have a “strong buy” recommendation, 1 suggests a “moderate buy,” and 2 call it a “hold.” Based on analysts' average price target of $66.36, Wall Street sees a potential upside of about 20.1% in the next 12 months.
The Verdict for Coca-Cola
Overall, Coca-Cola has shown remarkable resilience in difficult times. In the last five years, its top and bottom lines have grown at a compounded annual growth rate of 5% and 8%, respectively. Furthermore, its journey as a "Dividend King" is a testament to its enduring commitment to rewarding shareholders, no matter the economic scenario. The current pullback in the share price presents an excellent opportunity for both growth- and income-oriented investors to grab this resilient stock now.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
