Coca-Cola Stock's Buying Momentum Stalled
The Coca-Cola Company (NYSE:KO) stock has moved nowhere since my previous update in early January 2024. I argued why KO isn't aggressively valued relative to its fundamentally strong business model. Buying sentiments have also improved markedly as KO formed its long-term bottom in October 2023. Despite that, the market's enthusiasm over AI hype and worries about the effect of the GLP-1 drugs might have led to near-term pessimism.
Coca-Cola reported its fourth-quarter earnings release in February 2024. The beverage leader reported net revenue growth of 6.4% for FY23. While this was a distinct normalization from its double-digit topline growth in FY22, it wasn't unexpected. Moreover, Coca-Cola's robust pricing actions in 2023 helped mitigate currency headwinds and hyperinflationary dynamics in some markets. As a result, I believe it highlighted the robustness of Coca-Cola's wide-moat business model, underscoring its structural strength.
However, management also indicated that inflation headwinds are expected to moderate in 2024. The expectation is in line, given that the Fed is expected to lower interest rates sometime this year. However, Coca-Cola management cited ongoing currency headwinds that could affect its net revenue growth in 2024. Despite that, the company believes its ability to achieve a mid-single-digit comparable earnings growth is not anticipated to be affected by these challenges.
Coca-Cola projects adjusted EPS growth of between 4% and 5% in 2024. It has reflected currency headwinds, but it is still a marked slowdown from FY23's 8% uptick. As a result, the market could remain tentative over potentially weaker pricing levers, as Coca-Cola needs to bolster its volume growth in 2024 to rejuvenate its topline momentum.
Moreover, Coca-Cola remains committed to investing in its brand portfolio, bolstering its already significant brand awareness. In addition, its well-diversified portfolio seems well-insulated to manage the near-term impact of re-franchising operations in some emerging regions. While Coca-Cola has experienced tepid growth momentum in North America, we should expect stronger operating performances across its global portfolio.
Dividend King Status Unchanged
Moreover, Coca-Cola reported its 62nd consecutive annual dividend increase in mid-February, solidifying its status as a core Dividend King stock among income investors. As a result, it has lifted its quarterly payout to $0.485 per share, up 5.4%. Seeking Alpha Quant rated KO with a "B" dividend grade, which corroborates the strength of Coca-Cola's dividend profile. With a payout ratio of about 70% of its estimated FY24 adjusted EPS, I expect income investors to continue providing robust buying support at the current levels.
Moreover, KO is no longer aggressively valued. KO is valued at a forward adjusted EBITDA multiple of 19.2x, in line with its 10Y average of about 19.3x. As a result, I believe that Coca-Cola's fundamentally strong thesis should proffer more bullish sentiments from value and income investors at the current levels. With the Fed expected to lower interest rates this year, KO's forward dividend yield of 3.3% should also face less intense headwinds. In other words, I expect buyers to defend KO resolutely during intense pullbacks, helping to maintain its uptrend recovery.
Is KO Stock A Buy, Sell, Or Hold?
As seen above, KO remains in a long-term uptrend as buyers decisively defended its October 2023 lows. As a result, I'm confident we should see KO's April 2022 highs breached as investors reassess their conviction of a less hawkish Fed.
KO's solid profitability should help alleviate pricing pressures this year, even as the company is expected to temper its pricing actions in line with less intense inflationary pressures across its portfolio.
With KO arguably fairly valued, I maintain my bullish thesis on this Dividend King.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing, unless otherwise specified.
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