Coca-Cola (KO 2.24%) is one of the best-known consumer staples companies on the planet and has an incredible dividend track record. At a time of elevated market volatility, owning a stock like Coca-Cola can help investors sleep well at night. But is buying it today the right decision?
A business that’s easy to love
Coca-Cola, with its namesake soda and a host of other beverage products, has a global reach and loyal customers. It has an industry-leading distribution network, an industry-leading research and development team, and an industry-leading marketing team.
And while the products it sells aren’t exactly necessities, they are affordable luxuries. Consumers tend to keep buying Coke in both good markets and bad ones.
Image source: The Motley Fool.
This is why investors worried about the market’s swift decline following geopolitical tax issues might be tempted to add its shares to their portfolios. Indeed, consumer staples companies like this one tend to be highly reliable when it comes to earnings and dividends. Coca-Cola, for example, has increased its dividend annually for 63 consecutive years, which makes it a Dividend King.
A company doesn’t achieve Dividend King status by accident. It requires a strong business model that functions well in both good markets and bad ones.
Notably, its stock has long been a holding of Berkshire Hathaway, Warren Buffett’s investment vehicle. Buffett started buying it in 1988 specifically because he liked the business so much. He has added to his position multiple times over the years.
KO data by YCharts.
Coca-Cola has been a millionaire maker over the long haul
It would have taken as little as $15,000 worth of Coca-Cola at the start of 1988 for the stock to be a millionaire maker (with dividends reinvested). Buffett, however, bought far more than that, and it has been one of his most iconic choices.
That said, 1988 was more than three decades ago, so the stock has had a long time to grow its business. And today, it is much larger than it was way back when Buffett started buying it.
So, could Coca-Cola be a millionaire maker today? The answer is most likely yes, but it is no longer a fast-growing business. Slow and steady is its likely future, given that it takes a lot more to move the needle at a company with a $290 billion market cap than it does when that same company had a market cap of around $13 billion in 1988. Annualized earnings growth over the past decade was only about 5%, with the dividend growing at around the same rate.
Coca-Cola is reliable, but it isn’t likely to knock your socks off with its growth. Which makes buying at the right price all the more important. As Buffett’s teacher Benjamin Graham was fond of saying, overpaying for a great company can turn it into a bad investment. Right now, the shares don’t look very cheap.
Using traditional valuation metrics, Coca-Cola’s price-to-sales, price-to-earnings, and price-to-book-value ratios are all above their five-year averages. The dividend yield is near the lowest levels of the past decade. It looks expensive today.
To be fair, the stock is probably a reasonable place to ride out market turbulence. So it is hard to suggest that buying it would be a mistake. If you buy it at these levels, however, you’ll likely need to own it a long time before it turns into a millionaire maker.
KO data by YCharts.
There are other options in the consumer staples space
Coca-Cola is a well-run company, but given its valuation, it probably isn’t going to turn you into a millionaire very quickly. But there are other well-managed consumer staples companies that look cheap right now, including PepsiCo, Hormel Foods, and The Hershey Company.
All three of these reliable dividend stocks are beaten down because they are facing headwinds. Given their more attractive valuations, though, they are likely to have more long-term appeal for investors who think in decades and not days. The big story with PepsiCo, Hormel, and Hershey is that even good companies go through hard times, and that can open up great buying opportunities.
Which brings the story back to Coca-Cola. Right now, it isn’t struggling through hard times and, because the stock is a little expensive, you’ll probably want to look at other options if you are hoping to find a millionaire-maker investment.