Soft drink giant Coca-Cola (NYSE: KO) reported second-quarter results early Tuesday morning, stomping Wall Street's consensus estimates across the board. Coke's management followed up with bullish color commentary on the earnings call .
Coca-Cola's stock briefly soared on the news, setting a fresh 52-week high in the process. These shares are soaring just below the all-time record prices Coke set in the summer of 2022.
But it's too late to take advantage of Tuesday's brief price jump. Instead, prospective Coca-Cola investors should ask whether the stock remains a good buy after this report. So let's take a deeper look at Coca-Cola's business trajectory.
Coca-Cola stumped the Street
Your average analyst had expected Coca-Cola's revenues to fall roughly 2% year over year to $11.76 billion. Adjusted earnings were targeted at approximately $0.81 per share, up from $0.78 per share in the year-ago period. But Coca-Cola delivered a 3% sales increase to $12.36 billion. On the bottom line, earnings stopped at $0.84 per share.
Inspired by the strong results, management raised their revenue outlook for the full fiscal year. Organic revenue growth is not targeted at approximately 9.5% in 2024, up from 8.5% in the first-quarter report's analysis.
That's an impressive showing, but how did Coke stump the analysts?
Analyzing Coca-Cola's surprising revenue growth
In the words of Coca-Cola CEO James Quincey, the company's "all-weather strategy is working."
In other words, there's no revolutionary new ingredient in Coke's market-beating business potion right now. It is running the same business model as always, using a world-class system of franchised bottling partners to distribute its well-known wares around the world.
For example, a quick recovery from a soft sales period in the massive Indian market was led by classic brands Fanta and Sprite. The Philippines were energized by a restructured bottling network and a focus on smaller, more affordable soda bottles. The low-cost tactics also worked wonders amid a hyperinflation crisis in Nigeria.
If there was a star performer in this diverse mix of household-name products, it's Coca-Cola Zero Sugar. The modern twist on Diet Coke saw 20% year-over-year volume growth in the second quarter. In response, the company is expanding its visible marketing of Coke Zero to keep the momentum going.
"The power of our portfolio, amplified by our system's unique capabilities, is a clear advantage," Quincey said. "Each day, consumers enjoy approximately 2.2 billion servings of our products translating into about 800 billion servings annually. This kind of scale gives us unique insights into the consumer, which helps us to better tailor offerings."
Embracing AI and new strategies
Coca-Cola's current success may be firmly based in its traditional values and advantages, but that doesn't mean the company is resting on its red-and-white laurels.
As mentioned above, the company is quick to adapt its distribution strategy to the realities of global and local markets. Coke is also testing personalized messages to retail outlets where artificial intelligence (AI) systems analyze local sales data to generate a tailored list of suggested products and volumes.
"Initial pilots indicate that retailers who receive the messages are over 30% more likely to purchase recommended [products], which results in incremental sales for our retailers and the system," Quincey said. "We're just scratching the surface of what's possible, and we're taking steps to seize opportunities down the road."
Warren Buffett's masterful Coca-Cola dividend strategy
Master investor Warren Buffett bought his first 25 million Coca-Cola shares in the fall of 1988. Under his reins, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has neither bought nor sold a single one of those 200 million shares since then. The stock has split four times for a total ratio of 16-for-1 but Buffett simply held on to the resulting 400 million shares. Instead of reinvesting dividends in more Coke stock, Berkshire pockets about $776 million of annual cash gains from those payouts .
Buffett's long-term holding strategy is working wonders in this case. Coca-Cola's annual payouts added up to $1.20 per share in 1998. The payouts provided a yield of roughly 3.1% at the end of that year, based on a stock price near $38 per share at the time. Now, the annual dividends work out to an effective yield of 81% on Buffett's original investment. Remember, the split-adjusted price of a Coca-Cola share works out to $2.38 per current stub.
So Coca-Cola is a robust dividend payer, and those quarterly checks are financed directly from the company's rich bubbles of cash flow . Free cash flows came in at $3.3 billion in this quarter and $9.0 billion on a trailing basis. Dividend payments accounted for $8.0 billion of those cash profits.
The free cash flows ticked down by $693 million year over year but for good reason. Refranchising projects like the Philippine network makeover can be costly, but they also tend to boost Coca-Cola's long-term profits and should pay off in the long run.
Is Coca-Cola a smart buy in 2024?
Coca-Cola is trading near all-time highs thanks to robust business results, and it remains a fantastic dividend stock for patient income investors. The current yield of 3% is quite generous, and those payouts keep growing over time as Coca-Cola leverages its many business advantages while embracing new ideas like AI analytics.
While the stock isn't super cheap at 26 times earnings and 31 times free cash flow, you get what you pay for -- an industry titan for the ages. It will take decades to match Warren Buffett's ultra-effective dividend play on Coke, but you'll never lose a minute of sleep from putting this legendary income stock under your pillow or in your portfolio.
All told, you should consider adding Coca-Cola to your investment portfolio for steady dividends and unshakable long-term growth potential.
Anders Bylund 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 .
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