Everyone knows about Coca-Cola (KO -3.29%). With a portfolio of more than 200 different beverage brands and a presence virtually all over the globe, it's an American success story that's been around for more than a century. That durability is hard to ignore.
The company certainly possesses favorable qualities from an investment perspective. There are good reasons that Warren Buffett's Berkshire Hathaway owns a 9.3% stake in Coca-Cola.
But if you invest $5,000 in this beverage stock today, could Coca-Cola one day make you a millionaire?
Coca-Cola is an outstanding business
Coca-Cola's economic moat stems from its strong brand, which shows that this is a very high-quality business. Having a wide presence, a broad product assortment, influential marketing, and paying attention to what customers want all combine to support the company's industry positioning.
Its powerful brand also supports its pricing power. In the last three months of 2024, the company exceeded Wall Street's estimates on both the top and bottom lines. This was driven by a significant benefit from pricing trends.
Technology has caused the economy to change rapidly, which increased the disruptive forces that can cause trouble for even the most well-established companies. Just think about all the talk of artificial intelligence and how it could upend different industries.
Coca-Cola stands out in this regard because of its durability. I don't see technological forces changing the fact that people all over the world will want satisfying beverages to quench their thirst. Investors can have confidence that this company will still be relevant 50 years from now.
Coca-Cola's profitability is another factor highlighting how great the business is. The company's huge scale, and its strategic decision to outsource bottling and distribution capabilities to third parties, have resulted in tremendous earnings. In the past decade, its operating margin averaged a superb 26.9%.
Coca-Cola's consistent earnings support a dividend that management has boosted annually for 63 straight years. That's an unbelievable streak that hasn't been snapped by recessions, geopolitical tension, or other adverse events. At the current share price, the payout yields around 2.7%. That's more than twice the average yield of the S&P 500 today, making it an enticing option for income-focused investors.
NYSE: KO
Key Data Points
Is Coca-Cola stock a smart buy?
Coca-Cola might be a good enough long-term investment for Berkshire Hathaway, in part due to the ridiculous amounts of money it makes in dividend income from its 400 million shares. However, individual investors should be a bit more critical.
It's not a shock that this business is registering low growth. After some up and down years, its revenue is up by just 2.3% over the past decade. That's not on an annualized basis. Not only is the beverage industry extremely mature, but Coca-Cola is already everywhere, which limits its ability to expand.
If the stock's valuation was at an unusually low level, then maybe the stock would be a no-brainer buying decision. That isn't the case, though. As of this writing, shares trade at a price-to-earnings (P/E) ratio of 29. This is above Coca-Cola's five-year average, and it's definitely a premium valuation that reflects the company's positive attributes.
If investors are looking for a stock that can beat the market, I have zero confidence that Coca-Cola can achieve that goal. In the past 10 years, it has produced a total return of 139%, significantly trailing the S&P 500's. There's no reason to believe this trend won't continue.
Consequently, my opinion is the stock also isn't a millionaire-maker. Using a 30-year time horizon, that initial $5,000 investment in Coca-Cola would need to produce an annualized return of 19.3% to hit a seven-figure value. This just isn't a probable outcome, as there isn't much potential for capital appreciation.
However, owning the stock might make sense for certain investors. Those who appreciate safety, stability, and predictability should buy shares. And it's hard to argue with the dividend.
