Why Coca-Cola is One of My Favorite Investments

Investing in Coca-Cola (NYSE:KO) has always been a strategic choice for me, and here’s why it stands out as one of my favorite investments. Despite the stock trading mostly sideways recently, the underlying fundamentals and future projections paint a promising picture.

Steady Growth and Dividends

Coca-Cola (Opens in a new window) has demonstrated remarkable stability and consistent growth in its earnings per share (EPS) and dividends over the past five years, with a compound annual growth rate (CAGR) of approximately 5% and 3.5% respectively. This growth has led to an above-average dividend yield, currently about 3.22%, which is significantly higher than its historical mean. This makes Coca-Cola a quintessential dividend champion, offering investors reliable income even in volatile markets.

Valuation Discounts

Another appealing aspect is Coca-Cola's valuation (Opens in a new window) metrics. The current price-to-earnings (P/E) ratios are below their five-year averages by about 9-13%, indicating a valuation discount. For instance, on a trailing twelve months (TTM) basis, Coca-Cola's P/E ratio is 22.37, which is 9% below its five-year average of 24.63. This discount, coupled with stable profitability, suggests that the stock is undervalued, presenting an opportunity for market-beating returns in the long term.

Strong Brand and Franchising Model

Coca-Cola's robust brand power and extensive franchising network are key strengths that contribute to its resilience and growth potential. The globally recognized brand fosters strong customer loyalty, which transcends mere taste preferences and is reinforced by effective marketing campaigns. Additionally, the franchising and bottling network allows for greater operational flexibility and local market adaptation, which is crucial for scaling the business and entering new markets efficiently.

Expected Returns

Analyst consensus (Opens in a new window) estimates project Coca-Cola’s EPS to grow from $2.81 in 2024 to $5.03 in 2033, representing a CAGR of 6.0%. With an owner’s earning yield (OEY) approximated at 5% and an average return on capital employed (ROCE) of 33%, the real growth rate is projected to be around 1.5% per annum. Factoring in an inflation escalator, the long-term return potential could reach 8-8.5%, surpassing the expected market return of about 5.6%.

Risks and Final Thoughts

While Coca-Cola faces common industry risks (Opens in a new window) such as regulatory changes and shifts in consumer preferences, its international expansion and franchising model provide a buffer against these challenges. However, there are risks related to market saturation in North America and geopolitical uncertainties that could impact growth.

Overall, Coca-Cola is a solid choice for conservative and income-oriented investors. The combination of steady dividends, valuation discounts, and strong brand fundamentals makes it a reliable investment with potential for long-term market-beating returns. For those seeking stability and consistent income, Coca-Cola remains a top pick in my portfolio.