Coca-Cola Stands Out Amid Market Decline: A Unique Investment Opportunity
The major stock indexes have recently experienced a historic sell-off, mirroring the steep downturn seen during the COVID-19 plunge in March 2020. During this turbulent period, most stocks reached 52-week lows, yet Coca-Cola (NYSE: KO) distinguished itself as a notable exception.
On April 3, Coca-Cola reached an all-time high before pulling back on the following day. For the week, the stock declined only 0.6%, contrasting sharply with the Dow Jones Industrial Average (DJINDICES: ^DJI), which fell by 7.9%, the S&P 500 (SNPINDEX: ^GSPC) which dropped 9.1%, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) that plummeted 10%.
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Here‘s a closer look at why Coca-Cola is maintaining stability and assessing whether its stock is a worthwhile investment now.
Image source: Getty Images.
Coca-Cola’s Supply Chain Advantage
Year to date, Coca-Cola’s stock is up 12.3%, making it the second-best performer in the Dow and outperforming the consumer staples sector and other major indexes.
KO data by YCharts.
This level of outperformance may surprise some, considering Coca-Cola is a global company. Last year, only 39.6% of its operating revenue came from North America. The company relies heavily on international sales, which can be influenced by trade tensions and currency fluctuations.
However, Coca-Cola’s strategic advantages position it to absorb rising costs effectively. One key asset is its network of bottling partners, responsible for producing, distributing, and selling its products. This model mitigates risk and supports higher profit margins.
Similar to McDonald’s, where franchisees manage most restaurants, Coca-Cola primarily generates revenue from syrup concentrates sold to bottlers instead of managing operations directly.
This model yields impressive profitability, with an operating margin of 29.8% expected in 2024. For comparison, Apple reported a 31.5% operating margin in its last fiscal year. While a can of soda doesn’t carry the technological prowess of an iPhone, Coca-Cola’s exceptional supply chain results in nearly similar corporate profitability.
Building an Elite Brand Lineup
Coca-Cola’s efficient supply chain, combined with its shift beyond traditional soft drinks, has transformed it into a versatile international powerhouse across various nonalcoholic beverage categories: soda, juice, tea, coffee, water, sparkling water, sports drinks, protein drinks, and more.
An essential aspect of Coca-Cola’s success is its capacity to develop home-grown brands and realize the potential of acquisitions. For instance, the company increased sales of its Fairlife milk and protein shake brand from $10 million to $4 billion within just ten years. Additionally, volumes for sparkling mineral water brand Topo Chico have seen a tenfold increase since its acquisition in 2016.
With brands like Fairlife and Topo Chico leading the market, Coca-Cola has become the top provider of sparkling soft drinks, juice, and value-added dairy and plant-based beverages in North America. These categories complement its soda-centered sales mix, catering to health-conscious consumers and adapting to evolving customer preferences.
As of 2023, Coca-Cola beverages accounted for 44% of North American unit case volumes, while other categories like water, sports, coffee, and tea made up 22%, followed by sparkling flavors at 20% and juice/value-added dairy and plant-based drinks at 14%. Success in these non-soft drink categories enhances the company’s diversification.
Pricing Power
Coca-Cola’s robust supply chain and extensive brand recognition provide it with greater pricing power compared to competitors. This strength was particularly evident during the pandemic and the subsequent inflation spike. The company successfully raised prices, offsetting increased input costs.
In 2024, while unit case volume increased by just 1%, an 11% rise in price and mix generated a 12% boost in organic revenues. A similar pattern occurred in 2023, with a 2% rise in unit case volumes accompanied by a 10% increase in price and mix. The previous year saw even better volume growth, with a 5% increase, yet once again, price and mix were up by 11%.
Regardless of economic conditions, Coca-Cola has consistently demonstrated its ability to leverage pricing power to achieve growth when volumes may be lagging. This quality could give it an edge during periods of high tariffs or economic challenges.
A Passive-Income Powerhouse
In addition to being a strong operational business, Coca-Cola is also a high-quality dividend stock that meets shareholder expectations for consistent passive income.
The company has raised its dividend for 63 consecutive years, navigating through numerous economic downturns and recessions. Only 55 companies, known as Dividend Kings, have achieved at least 50 years of dividend increases. Investors can trust Coca-Cola and its 2.9% dividend yield to provide steady passive income regardless of broader market dynamics.
The stock’s valuation is reasonable, though not necessarily cheap, with a price-to-earnings ratio (P/E) of 28.3, compared to a 10-year median P/E of 27.5. Coca-Cola has historically commanded a premium valuation, which is justified given its status as a high-quality business.
A Balanced Buy
For risk-averse investors, Coca-Cola represents a well-rounded, reliable investment option. However, investors should refrain from dramatically adjusting their portfolios solely because of broader market trends.
Rather than abandoning growth stocks in favor of value stocks like Coca-Cola, it may be more prudent to evaluate the role these dividend stocks could play within your portfolio.
For instance, if you possess a high-risk tolerance and a long-term investment outlook, Coca-Cola can be an accessory to your growth strategy. Conversely, it may serve as a cornerstone investment for those prioritizing passive income who have a lower risk tolerance.
Should You Invest $1,000 in Coca-Cola Right Now?
Before placing a $1,000 investment in Coca-Cola, consider this:
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
