Is there a more iconic American brand than The Coca-Cola Company (KO -0.15%)? The global beverage giant sells over 200 brands of soda, water, juice, tea, coffee, and other drinks to billions of people. Renowned investor Warren Buffett is famous for his affinity for the company and has maintained a significant position in Coca-Cola via Berkshire Hathaway for decades.
It's almost so well known that it bores investors. Tell anyone in the office break room that you're buying Coca-Cola stock, and you'll probably struggle to get much of a reaction. Don't make the mistake of dismissing this blue chip dividend stock. Here are five reasons to buy Coca-Cola stock like there's no tomorrow.
1. It could be the world's most dependable business
Most people think you get wealthy from stocks by hitting a quick home run, but the big money is usually made slowly over long holding periods. People look past the slow-and-steady growers, but they are often the likeliest path to your financial goals. There might not be a more durable business than Coca-Cola.
Everyone needs to drink fluids to survive, and the chances are that you can find a Coca-Cola beverage wherever you are. That includes grocery stores, restaurants, gas stations, convenience stores, arenas, planes, you name it. The company's portfolio of over 200 brands includes Coca-Cola, Diet Coke, Sprite, Fanta, Gold Peak, Minute Maid, and Powerade. The company sells 1.9 billion servings across 200 countries daily, and 28 brands generate at least $1 billion in annual revenue.
Coca-Cola is making money as long as people are out and living their lives.
2. It has endless incremental growth in a global market
Coca-Cola is not a high-growth business at its size, but the global beverage market is so large and fragmented that the company has a virtually endless growth runway. Since 1990, the global beverage market has grown by approximately 3% to 5% annually. That's a solid path to steady mid-single-digit revenue growth without factoring in market share.
Plus, there is still so much room to increase customer engagement. Less than 30% of the world's developed population (20% of the global population) consume a Coca-Cola beverage more than once weekly. Most people in emerging markets, the remaining 80% of the world, still rarely drink a Coca-Cola beverage. That's a tremendous opportunity as emerging markets economically develop over the coming decades.
3. It's an efficient, cash-producing business
Companies that make shareholders wealthy must be efficient and profitable, and Coca-Cola meets both criteria. In a given year, the company converts roughly 20% to 30% of its sales into free cash flow and earns a solid 15% return on invested capital. In other words, good things happen when Coca-Cola invests in the business.
KO Free Cash Flow (% of Annual Revenues) data by YCharts
From a non-numbers point of view, such a lucrative business signals that Coca-Cola has a competitive moat. It has remarkable leverage over its distribution (places where it sells its products). A seller will almost always give Coca-Cola products the best shelf space, making it difficult for other beverage brands to compete. And if they do find success, Coca-Cola isn't afraid to buy them out.
4. The dividend is terrific
Many people know Coca-Cola stock for its dividend, which is remarkable and one of the most important reasons the stock can make you money over the long haul. The company is a Dividend King with 62 consecutive annual dividend increases. Today, the dividend payout ratio is 68% of 2024 earnings. That's plenty of financial cushion for a business that doesn't need to spend much money besides advertising.
How important is the dividend to long-term investors? The above chart compares Coca-Cola stock's long-term performance using just price appreciation versus total returns (dividends included). The best way to profit from Coca-Cola stock is to buy and hold it and reinvest the dividends for a long time.
5. The stock is a stellar company at a solid price
You may be sold on the company now, but what about the stock? You don't need to put as much emphasis on valuation when you invest for a decade or more into the future. Still, you don't want to egregiously overpay for a stock like Coca-Cola because it doesn't grow fast enough to burn off an expensive valuation quickly. At the same time, dependable, proven winners like Coca-Cola often enjoy a higher valuation.
Today, the stock trades at just under 22 times 2024 earnings, notably below its five-year average price-to-earnings ratio of 26. That makes the stock a buy today because even if you still don't think it's a bargain, investors will probably realize most of Coca-Cola's future growth and dividends as investment returns. Buy, hold, reinvest, and enjoy the long-term journey.
