Coca-Cola(NYSE: KO) investors haven't had a lot to celebrate lately. Their stock has completely sat out the 2023 market rally and is in negative territory through late August. The picture doesn't brighten much if you zoom out, either. Coke's returns have trailed the S&P 500 over the past decade, even after accounting for dividend reinvestments.
The beverage giant's business trends are another story. Coke is enjoying strong growth, market-leading profitability, and excellent cash flow. These factors should support robust returns for shareholders -- assuming they don't overpay for this high-performing company.
With that bigger picture in mind, let's look at Coke's potential as a long-term holding in your portfolio.
All the right moves
Coke's most recent earnings report contained nearly all the good news that an investor could hope for from a consumer-facing business today. Sure, sales volumes were flat as shoppers scaled back on some spending. But Coke showed off its pricing power by raising prices 10% without sacrificing much in the way of demand. Core beverage franchises like Coca-Cola performed well, and so did non-traditional brands like Smartwater, Powerade, and Topo Chico.
Profitability rose, too, at a time when many peers are struggling with flat or declining operating margins. Coke converted 32% of sales to operating profit last quarter while PepsiCo's margin held closer to 13% of sales. These factors all indicate a business with an excellent market share position in an attractive global industry.
Cash flow and returns
Coke stock will appeal to investors who favor cash, with $5 billion in operating cash flow generated in the past six months. Free cash flow was nearly as high at $4 billion.
These wins give executives all the resources they need to direct toward supporting growth through spending on marketing, R&D, and Coke's world-class selling infrastructure. They also support a growing dividend that today yields over 3%. "We are executing efficiently and effectively," CEO James Quincey told investors in late July.
The price is right
The main drawback with the stock today is it doesn't seem especially cheap even after trailing the market in 2023. Shares are trading for 6 times sales today, or more than twice the valuation that PepsiCo enjoys. That valuation hasn't moved much in the past three years, peaking at over 7 in mid-2021 and reaching a low of 5.5 late last year.
There are some good reasons for Coke to enjoy a premium like that, though, including the fact that management just raised its sales and earnings outlook for 2023. Toss in the company's massive competitive advantages and market-leading profitability, and there's every reason to expect good returns for patient shareholders.
It's true that Coke likely won't see the type of sales gains that are common among high-growth tech stocks. This business is far more recession-resistant, however, and provides a steady stream of rising dividend income that will further buffer your returns through market volatility.
That's an attractive balance between risk and reward that most investors will find valuable in a diversified portfolio. Consider adding Coke to your watch list -- if not your portfolio -- today.
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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.