Coke is growing its top and bottom lines despite a challenging operating environment.
Coca-Cola (KO 1.27%) stock blasted to an all-time high on Friday after reporting its second-quarter 2024 earnings earlier in the week. The consumer staple giant posted solid results and shared uplifting guidance. Here’s why Coke deserves to be at an all-time high and why the dividend stock is worth buying now.
1. The business model is working
Unlike PepsiCo, which mostly operates its own production facilities, Coke leverages a global business model centered around royalties, franchised bottling partners, and a highly sophisticated supply chain. Its business model is perfect for capturing growth in global markets because it keeps the company’s spending low and profit margins high.
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Coke can also play to consumer preferences in different regions. Sprite and Fanta recently experienced reformulations and did well in India in the recent quarter. Mexico and Brazil continue to carry the Latin American business. New product releases, like Sprite Chill and Topo Chico Sabores, were received well, and Coca-Cola Zero Sugar experienced 20% volume growth. Minute Maid Zero is targeting growth in North America.
Coke’s business model, paired with its international exposure, is limiting the impact of challenged North American consumers. Coke may be an American company, but its business relies more on international growth than domestic performance. For the quarter, North American revenue was $4.81 billion — just 38.9% of total consolidated revenue. Meanwhile, North American operating income was 30.4% of operating income (excluding corporate).
2. Impressive organic growth
Overall, Coke is doing a phenomenal job balancing pricing and volumes. Its pricing power has been on full display over the last few years, which helped operating margins surge over 30% — which is extremely high for a consumer staples company.
KO Revenue (TTM) data by YCharts.
But recently, Coke has had to adapt to tighter consumer spending and has responded by trading some margin for higher volumes. The strategy has worked, as Coke’s revenue has rebounded and margins are still respectable. The business is now in its best shape in 20 years — and that’s largely due to effective execution by management and the company’s winning business model.
Coke now expects full-year 2024 organic revenue (non-GAAP) growth of 9% to 10%, non-GAAP earnings per share (EPS) growth of 5% to 6%, and $9.2 billion in free cash flow (FCF). If it hits its goal, Coke could surpass its all-time high split-adjusted EPS of $2.53 from 2010 while generating near-record FCF.
3. A manageable dividend
A core part of Coke’s investment thesis is to generate enough earnings and FCF to cover the dividend while leaving room to reinvest in the business or buy back stock. In February, Coke raised its dividend for the 62nd consecutive year to $1.92 — giving it a healthy payout ratio of 68%, based on 2024 non-GAAP EPS of $2.84.
Coke paid $2.18 billion in dividends for the quarter — or $8.73 billion annualized. That gives the company one of the top 10 largest dividend expenses of companies in the S&P 500. But the company generates more than enough cash to cover that expense. Supporting a dividend with FCF is vital to sustaining a healthy balance sheet and managing debt.
The company has a stellar track record of dividend raises, a current yield of 2.9%, and the ability to support its dividend with earnings and cash. Coca-Cola truly checks all the boxes of a quality dividend stock, which makes it a worthy passive-income source for risk-averse investors or folks looking to supplement income in retirement.
Bridging the gap between expectations and reality
Stocks go up for a variety of reasons. But in general, it’s usually because the company is exceeding investor expectations.
For a growth stock, that could mean that sales growth is accelerating and there’s a better trajectory for future cash flow and earnings. But for Coke, investors want moderate top-line and bottom-line growth, paired with a stable and growing dividend. It sounds simple, but this is no small task.
As mentioned, Coke is paying $8.73 billion in dividends a year — so a 5% dividend raise means another $436 million in dividend expenses. For Coke to afford that tier of expenses and expectations for higher raises, it has to have a strong portfolio of beverage brands and opportunities to add new brands. It also must limit the number of mistakes that will invariably occur with a company this large.
After its recent run-up to an all-time high, Coke now sports a 27.3 price-to-earnings ratio — which isn’t cheap. But it’s reasonable, considering Coke is performing at a high level.
Add it all up, and Coke remains a compelling passive-income opportunity and an excellent buy now.
