The beverage behemoth ticks off all of the most important boxes for a buy-and-hold investment.
Are you looking for a new, all-around sort of pick for your portfolio? If so, take a good long look at The Coca-Cola Company (KO -0.46%).
Predictable? Perhaps. Lots of people certainly recommend it, and lots of people own it. Maybe it's even a little cliché as far as stock suggestions go.
Selecting stocks isn't meant to be adventurous, however. It's a means to an end. Your ultimate goal is turning a little money now into a lot of money later by taking as little risk as possible. Your top job as an investor is just finding an acceptable balance between the two. Coca-Cola stock offers a nice balance of risk and reward for three key reasons.
1. Coca-Cola is positioned to remain a market leader
Experienced investors probably recognize that the economy's leading companies often make for relatively expensive stocks. Successful investing veterans, however, also recognize that paying this premium for a stake in a high-quality company usually ends up paying for itself.
It's an idea that certainly applies to Coca-Cola right now. The stock's trading at a trailing-12-month price-to-earnings (P/E) ratio of more than 24 and a forward-looking P/E of nearly 22. There are some well-respected technology growth stocks that don't sport such valuations. But The Coca-Cola Company arguably justifies this premium. Its share of the domestic soda market stands at more than 40%, according to data compiled by Beverage Digest, and it's doing similarly well overseas as well as with its non-carbonated products.
The company isn't apt to cede this market-leading position either, for a couple of reasons. One of them is the fact that it's been marketing its products so well for so long that Coca-Cola has become an important part of the culture and lifestyle; much of its revenue is rooted in habit. The other reason is, by virtue of being the biggest name in the business, it can afford to advertise and promote its brands more than its rivals.
And it's not just its namesake cola. The Coca-Cola Company is also the company behind Gold Peak Tea, Sprite, Minute Maid juice, Powerade, Dasani Water, and Fresca, just to name a few. Being poised to remain one of the leading names in several different beverage categories ultimately bodes well for Coca-Cola stock.
2. The business model is brilliant
It's not merely its wide array of perpetually marketable products that makes shares of Coca-Cola such a fantastic, all-around stock, however. The business model is brilliant as well.
Contrary to a common assumption, The Coca-Cola Company doesn't do much of its own actual bottling these days. Several years ago it began selling off the majority of its bottling plants to more localized bottlers and distributors so it could better focus on what it does best. That's marketing and advertising. The bulk of its revenue is now driven by the sale of branded, concentrated syrup to these bottlers.
This is no minor nuance. Bottling and distributing is cost-intensive. Not only does it require facilities and expensive equipment, it also requires manpower and logistics (delivery) infrastructure. These components of the beverage business were always challenging to support. But, in the wake of a wave of inflation since 2022, bottlers' profits have been severely pressured.
Coca-Cola, though, doesn't incur many of these expenses. Flavor concentrate is -- by definition -- concentrated into relatively small containers that are easier to fill and ship. The end result is a business with relatively low operating costs, translating into high-margins thanks to loyalty-driven demand for its brands of beverages.
3. Coca-Cola stock's dividend pedigree is fantastic
Last but not least (and perhaps most important), The Coca-Cola Company is a dividend juggernaut. Not only has it paid one every quarter for decades now; it has raised its annualized payout every year for the past 62 years.
And it's not like it can't afford to continue doing so. Last year's adjusted per-share earnings of $2.69 is much more than the $1.84 worth of per-share dividends dished out in 2023, maintaining a dividend-payout ratio of around 68% that's been in place for a long, long time. The dividend payment and its growth have been so reliable, in fact, that over the course of the past 20 years the stock's dividend payments have been almost as rewarding as the stock's capital gains. Moreover, had you reinvested those dividends in more shares of the stock, an annualized growth rate of less than 5% would be improved to nearly 8%.
There are faster-growing stocks in the market, some of which even pay respectable dividends. There aren't many alternatives currently sporting a dividend yield that's close to Coca-Cola's 3.2%, however, that alsooffer the same sort of reliability.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
