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Stock of the Month: Coca-Cola Company (KO)

Written by Donnie Nguyen

August 8, 2020

The August 2020 stock of the month is The Coca-Cola Company (NYSE: KO). Coca-Cola is a component of the Dow Jones Industrial Average. It’s also a dividend aristocrat, a member of the S&P 500 that has increased its dividend every year for at least 25 years. In fact, KO increased its annual dividend for the 58th time in February 2020. This period includes several bear markets, most notably the 1973-74 stock market crash and the Great Recession of 2007-09.

Coca-Cola is the sixth most valuable brand in the world, according to Forbes. We all know its signature Coca-Cola brand soft drink, but KO owns several other well-known beverage brands like Sprite, Fanta, and Dasani. Two of its beverages that regularly find their way to my fridge are Simply (juices and drinks) and Fairlife.

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Warren Buffett said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” I believe that Coca-Cola is a wonderful company. And because of the pandemic lockdowns, its stock is selling at a fair price. Speaking of Buffett, KO one of Berkshire Hathaway’s (NYSE: BRK.B) largest holdings.

I like KO for primarily for the following reasons:

  • Dividend growth
  • Company leadership
  • Focused on growth
  • New product offerings
  • Excellent credit rating

DIVIDEND GROWTH

KO’s current dividend yield is 3.43% based on Friday’s closing price of $47.80. Considering that most high-yield savings rates are paying 1.00% these days, KO’s dividend yield is awesome.

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But is its dividend safe? I think that it is, and here’s why.

First, KO has increased it’s dividend 58 years in a row, through some of the most tumultuous times in history. This period of COVID-19 lockdowns could possibly be the worst. But a 58-year history and culture of increasing the dividend is something that any company, especially Coca-Cola, will want to protect.

And second, in the last earnings conference call, John Murphy, Coca-Cola’s CFO, stated that one of its priorities was to “continue to grow the dividend.”

Unless the worst-case scenario unfolds, I expect KO to continue growing its dividend.

COMPANY LEADERSHIP

Coca-Cola is led by James Quincey, CEO since 2017, and Chairman of the Board since 2019. I believe that he is the key to leading KO back to growth. After several years of decreasing revenues, KO finally grew revenues in 2019. I attribute this to the growth mindset of Quincey.

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2020 will clearly be a tough year for Coca-Cola, but with Quincey at the helm, KO should get through it and come out stronger on the other side.

FOCUS ON GROWTH

In the most recent earnings conference call, the company laid out its growth strategy. KO will stop efforts on their failing brands. For example, they discontinued their Odwalla juice business in July. Instead, KO will make much bigger bets and investments into its winning brands. It will also continue to test several product offerings and scale them up if it looks like they will be winners.

KO also acquired Costa Coffee in 2019, showing it is willing to take risks to grow.

NEW PRODUCT OFFERINGS

Two new products that I’m very excited about are Topo Chico Hard Seltzer and Coca-Cola Plus Coffee. If these new products gain traction, they could make a decent contribution to KO’s top and bottom line.

EXCELLENT CREDIT RATING

According to Markets Insider, Moody’s (NYSE: MCO) Rating for Coca-Cola is A1 was of 4/29/2020. And its Moody’s analytics risk score was 1, the lowest risk on a scale of 1 to 10. This is a testament to KO’s strong balance sheet. This will allow KO to maneuver through these uncertain times.

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RISKS

The biggest risk to Coca-Cola is the lockdowns caused by COVID-19. On-premise sales contribute to approximately 40% of KO’s product sales. As great a company that Coca-Cola is, no company can take that kind of sustained hit to their business without some major impacts.

In the earnings conference call, the company stated that the worst was probably behind them. So that is promising.

STATS (as of August 7, 2020)

Closing Price: $47.80

Share Outstanding (from 10Q): 4,295,438,919

Market Cap: $205.3B

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M1Finance.com

Revenue (Q2 2020): $7.15 billion

Revenue Growth (yoy): -28.4%

Net Income (Q2 2020): $1.779 billion

Diluted EPS (Q2 2020): $0.41

Diluted EPS Growth (yoy): -32.8% 

SHOULD I BUY THIS STOCK?

Coca-Cola could be a good addition to a portfolio that wants exposure to:

  • Consumer Staples Sector
  • Beverages Industry
  • Large Cap Value Stocks
  • Dividend Growth Stocks

Be sure to do your own research and determine if Coca-Cola is a good stock for your portfolio.

HOW MUCH OF THIS STOCK SHOULD I BUY?

Here are some portfolio guidelines we Wolves try to live by:

  • Thou shalt not hold more than 35% in any one particular sector
  • Thou shalt not invest more than 10% of principal into one individual stock
  • Thou shalt make small purchases. The general rule of thumb is to spend no more than 2% of your portfolio on a single purchase and build up your position over time.

These portfolio guidelines have helped me tremendously through my 20+ years of investing.

BOTTOM LINE

Coca-Cola is a dividend aristocrat stock with a 3.43% dividend yield. Its leadership team is focused on growth. The lockdowns caused by the pandemic are impacting its business. Once on-premise businesses fully reopen, Coca-Cola could return to growth.

So what do you think about Coca-Cola? Let me know in the comments section.

Disclosure

I/we own shares of KO, BRK.B, MCO

Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies whose stocks are discussed in this article.

DISCLAIMER: I'm not a financial advisor. These are my opinions and provided "as-is". It is not an offer to buy or sell securities. Read the Terms and Conditions.

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Donnie Nguyen

Donnie Nguyen

Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.

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