There are some investors who want their stocks to soar in value. Others simply want the companies in their portfolios to write them a check on a recurring basis. T here are very few businesses that have the track record that Coca-Cola (NYSE: KO) does in the latter regard.
In February, the world's leading beverage company announced a 5.4% dividend hike, the 62nd straight year that the payout has been increased. That's a truly phenomenal track record. But is Coke a no-brainer buy right now?
Coca-Cola's competitive advantages
Investors must first realize that this is a very high-quality business, for a few reasons. For starters, Coca-Cola owns one of the world's strongest brands, and has for many decades. Its customers are loyal, thanks in large part to effective marketing and products that consistently satisfy them. The brand strength singlehandedly separates it from other beverage companies.
Lately, the market has been enamored with high-flying tech stocks, particularly those with sizable exposure to artificial intelligence. Viewed in this light, Coca-Cola is extremely boring. But that's not necessarily a bad thing.
The company is at a very mature stage. The fact that the industry exhibits muted growth prospects means Coke has minimal threat of disruption because it won't need a lot of capital or innovation. You can bet that the business will still be around and dominating its market 50 years from now. That durability helps shareholders sleep well at night.
And it puts up consistent financial performance, even though growth is hard to come by. Sales of $45.8 billion in 2023 were actually slightly below the total 10 years earlier in 2013. That can certainly be cause for concern for investors.
However, the business is very profitable, with $9.7 billion in free cash flow in 2023. This helps fund the long-running dividend, which has almost zero risk of going away anytime soon.
Warren Buffett long ago figured out that this is a great business. As of March 31, his Berkshire Hathaway owned 9.3% of Coca-Cola's outstanding shares, giving the conglomerate $776 million in annual passive income based on the yearly dividend of $1.94 per share.
Not quenching investors' thirst
Coca-Cola has key traits of a quality business, but that doesn't mean you should invest in the stock without hesitation. In fact, I don't believe shares are a no-brainer buy.
The stock just hit a fresh all-time high on July 26 and now trades at a price-to-earnings (P/E) ratio of 27.2, a 15% premium to the S&P 500 . With that valuation, you would think that Coca-Cola had crushed the market, but that isn't true -- the stock produced a total return of 128% in the past decade, underperforming the S&P 500 by a significant margin.
Adjusted earnings per share have climbed at an annual average of 2.6% in the past 10 years. And consensus analyst estimates call for them to rise at a yearly rate of 6.6% between 2023 and 2026. Therefore, I see very little chance that Coca-Cola will outperform the S&P 500 over the long term, even with its dividend yield of 2.9%.
If investors want to beat the market, then it's clear that Coca-Cola is best kept out of their portfolios. The only reason the business could be a worthy investment candidate is if its P/E dropped considerably -- say, below 15 -- but I'm not sure if that will ever happen.
Neil Patel and his clients have 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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