KO

Coca-Cola: Buy, Sell, or Hold?

There's a ton of evidence that The Coca-Cola Company (NYSE: KO) is a great business. It's one of the most well-known brands worldwide. It's paid and raised a dividend for over six consecutive decades. It's one of Warren Buffett's top holdings at Berkshire Hathaway. What's not to like?

Well, a great company isn't always a stellar investment. Sometimes, the money is made in investing when you buy, not when you sell. In other words, you can't mindlessly buy stock in a good company and automatically make money.

So, I've dug deep into Coca-Cola to determine whether the stock is poised to make you money today.

Here is what you need to know.

1. Coca-Cola possesses strong pricing power

Pricing power is a hallmark of a great business, and Coca-Cola has that in spades. The company recently reported first-quarter earnings, posting 3% net revenue growth bolstered by a 13% year-over-year pricing and product mix boost to compensate for slight volume declines, currency headwinds, and corporate adjustments.

Coca-Cola has multiple pricing levers. It can simply inch the price of its products higher by a penny or two at a time, and it can sneak price increases by selling smaller quantities at higher-per-fluid ounce prices that look like cost savings because their purchase price is technically smaller. For example, a 12-ounce can versus an eight-ounce can.

The strong U.S. dollar and geopolitical conflicts are real headwinds that would logically explain a downturn in Coca-Cola's business. Instead, the company consistently grows, even if it's not always by leaps and bounds. The company's consistency over generations is how it's been such a successful stock.

2. The famous dividend is safe and growing

Coca-Cola's dividends are a big reason for buying the stock. It offers the best of both worlds: a solid 3.1% starting dividend yield and steady growth, headlined by its 62 years of consecutive increases. Investors who reinvest the dividends and wait patiently have gotten the most out of Coca-Cola stock.

The dividend payout ratio is also solid, at 79% of cash flow. The business doesn't need much investment, as it primarily makes concentrates and syrups and works with an independent partner network for bottling and product distribution.

KO Cash Dividend Payout Ratio Chart

KO Cash Dividend Payout Ratio data by YCharts

The dividend has grown by an annual average of 3.5% over the past five years, which is a slow, steady, tortoise-like pace you can rely on. Analysts believe Coca-Cola will grow earnings by more than 6% annually over the next three to five years, so shareholders might see higher dividend growth moving forward.

3. Shares aren't a bargain today

The only downside to Coca-Cola stock is that overpaying for it can hurt your investment returns. While Coca-Cola is consistent, growing at a mid-single-digit pace makes your price critical because the company won't quickly outgrow a premium paid for the stock.

Today, Coca-Cola trades at roughly 22 times its expected 2024 earnings. That's a PEG ratio of over 3, assuming the company grows earnings at the 6% clip analysts anticipate. I generally like to buy stocks with PEG ratios around 1.5 or less.

One could argue that Coca-Cola's reputation and fundamentals earn the stock a premium. That may be warranted, but these valuations have no margin of safety.

Coca-Cola: Buy, sell, or hold?

The stock's valuation isn't so high that investors are doomed to years of no returns. So, I don't think investors holding the stock should necessarily sell their shares. However, it's hard to justify new money coming in and buying the stock at this price.

Instead, consider Coca-Cola stock a hold for now. Should the stock fall to a forward P/E in the 18-19 range, shares will look much more enticing.

Should you invest $1,000 in Coca-Cola right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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