Coca-Cola Stock: Approaching A Key Area (NYSE:KO)

In spite of the troubles in the recent weeks, Coca-Cola (NYSE:KO) is still flat to mildly positive year-to-date compared to S&P’s 23% decline. The relative safety is clear but that does not mean Coca-Cola wasn’t or isn’t overvalued on a standalone basis. As we wrote in a recent article, we did trim Coke in the early to mid $60s and, in hindsight, this proved to be the top from which the stock has pulled back about 12%.

3% Yield is Near

At $58.66, Coca-Cola will yield exactly 3%. The 3% yield mark, as we’ve repeated in a few of our articles, is like a “yield base”. In spite of 59 years of consecutive dividend increases, the yield remains relatively low because the share price has caught up with increasing dividends. As shown in the chart below, only twice since 1987 has the yield been significantly higher than 3%: once during the 2008/09 financial crisis and once during the COVID meltdown in 2020.

But, what about the ‘I’ and the ‘R’ words?

Coca-Cola is not immune to inflation challenges that the entire World is facing but this company’s power over its suppliers and its operational efficiencies are second to none. As one of the most iconic brands in the World, price increases (aka passing on the cost to consumers) is something Coca-Cola can and has done without adverse effects. Not surprisingly, Coca-Cola almost always makes it to any “recession proof” portfolio.

As we approach the end of the second quarter, it may be worthwhile to look back at the most recent quarter for trends. This article covering the company’s first quarter result highlights three key aspects:

• Price increases obviously helped.
• The company’s “conservatism” likely led to them not boosting forecasts. It is the same “conservatism” that the company has operated with day to day to milk maximum profits.
• Increasing demand globally.

Speaking of demand, except a couple of examples, most countries are back and fully functioning. With more travel and leisure activities expected to be the norm in spite of local inflation, Coca-Cola can expect demand to remain strong over the next few quarters at least. This has not gone unnoticed as Coca-Cola is expected to be one of the few stocks to top earnings estimates this year. Analysts price targets are always to be taken with a pinch of salt but a median price target of $70 represents an upside of ~19% not including dividends. Not too bad.

Safe(ish) but Risky

Sounds contradicting? Well, welcome to the 2022 market. While Coca-Cola has so far avoided the pasting, no one can be sure who is next. When they raid the house, they take them all. We knew this from a long time ago but recently experienced this with another of our dear holdings, Altria Group (MO), which was a spectacular performer for about the first five months and then has become “one of them” with a negative 5% YTD performance.

Another high impact but low probability risk for Coca-Cola is any potential lockdowns due to COVID. The odds of this are fairly low as things stand but hey, none of us predicted any of the events of the last two years from COVID to the fears of World ending as a result to vaccines to Omicron. A little humility is never misplaced.

Conclusion

This market has been painful for almost everyone, except those who are net short. But with pain comes the opportunity to learn and grow. We’ve rarely seen a market that whips back and forth as violently as this one, so much that we get interested to buy things only on 5%+ down days. Coca-Cola is nearing a price range that makes it an attractive long-term hold. The dividend growth has slowed down undoubtedly, which makes your buying price even more critical. A low $50s to mid $50s on this company sounds attractive to us in the long-run, while offering relative safety in the short term. What about you?