The veteran beverage company is enjoying solid revenue growth.
With the threat of a recession receding, many stocks saw gains in the past few months. One of these worth taking a look at is blue-chip company Coca-Cola (KO -0.14%). The beverage giant hit a 52-week low on Oct. 6, but has since bounced back. Even so, shares are still off a 52-week high of $64.99 reached last April.
Does this mean Coca-Cola is a buy? Should investors who already own shares sell with the current rise in stock price, or continue to hold?
Coca-Cola's financial performance
Coca-Cola's revenue experienced a rough patch during the COVID-19 pandemic lockdowns, but as these restrictions receded, the company's sales reversed course and began an upward trajectory. Now, Coca-Cola is delivering solid financial results.
Data by YCharts.
For example, in its third quarter, the company experienced 8% year-over-year revenue growth to $12 billion. Net income also rose in the quarter to $3.1 billion from the prior year's $2.8 billion.
Coca-Cola expects full-year 2023 results to deliver at least 10% year-over-year organic revenue growth. That's an increase from last February's original guidance of a minimum 7% growth. The company reports 2023 full-year results on Feb. 13.
How Coca-Cola is succeeding
Coca-Cola's revenue resurgence is thanks to a strategy focused on improving the company's return on invested capital. For instance, Coca-Cola pared back its portfolio of beverage brands from around 400 to 200, allowing it to concentrate on the products with strong revenue and profit growth. Although accounting for about half the company's product portfolio, the eliminated brands represented only 1% of revenue.
Another factor helping Coca-Cola is that it's a global business. If one region shows soft sales, as seen in China during Q3, strength in other regions can offset this shortfall, as was the case with Latin America, India, and Southeast Asia in the quarter.
In addition, the company's multi-year path to refranchising its bottling operations is helping Coca-Cola's financial health. This strategy enables the company to move away from this capital-intensive, low-margin business by selling the operations to local bottling partners.
In Q3, Coca-Cola entered into an agreement to refranchise its Philippines bottler, paring down the company's bottling operations to just India, Oman, Africa, and a handful of locations in Southeast Asia. Coca-Cola once held bottling operations around the world, including in the U.S.
Back in 2015, this bottling business accounted for over 50% of net revenue, and the company's return on invested capital was about 17%. Thanks to refranchising, bottling operations now comprise less than 20% of net revenue; yet, Coca-Cola's return on invested capital has risen to over 23%.
Deciding on Coca-Cola stock
Coca-Cola's strategies have helped its financial performance, and one key financial area important to investors is the company's free cash flow (FCF). FCF provides insight into the cash available to invest in the business, pay debt obligations, and repurchase shares or fund dividends.
And Coca-Cola's dividend is a compelling reason to buy and hold shares. The company has increased its dividend annually for an impressive 61 consecutive years, and possesses a solid yield of 3% at the time of this writing.
Through three quarters, Coca-Cola's FCF was $7.9 billion, a $636 million increase over the previous year's FCF of $7.3 billion. The company paid out $4.1 billion in dividends during that time, so FCF was ample enough to cover the dividend payout.
Another consideration in deciding whether to buy, hold, or sell Coca-Cola shares is the assessment of Wall Street analysts. Among this group, the average price target for Coca-Cola stock is currently $65.49, and the consensus is an overweight stock rating. So Wall Street is recommending to buy shares.
That's understandable, considering that Coca-Cola's strategies for success, such as its streamlined product portfolio, are generating good financial results. Moreover, the company expects double-digit organic revenue growth for 2023, which is excellent, and its dividend looks secure given FCF is rising.
All things considered, this would be a good time to buy Coca-Cola shares -- and then hold on to them to collect the solid dividend. The time to sell may come eventually, but for now, Coca-Cola remains a worthwhile long-term investment.
Robert Izquierdo has positions in Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
