Is it too late to buy Coca-Cola stock now?

The beverage giant Coca cola (K.O 0.74%) is on the roll. The stock is making fresh daily highs — thriving with a 15% gain over the past two months, while the broader market has moved sideways.

But you know what they say about past performance and future results. The view in the rearview mirror is not always a good guide to what lies ahead.

So Coca-Cola’s recent results look great, but what’s next? Let’s see if there’s any drink left in Coca-Cola’s market-beating recipe.

Coca-Cola’s business empire at a glance

Coca-Cola’s business strategy is simple enough, but it has been decades in the making. Having built a global distribution network and unbeatable brand recognition over the years, the company capitalizes on these unmatched assets. Coca-Cola is constantly changing its strategy with new flavors, fresh marketing ideas and a range of global pricing policies to suit each local market.

The company is so simple that a ham sandwich could run it successfully. What else do you expect from a company where Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) owns 9.3% of the shares? Investor genius prefers very simple business plans, and Coca-Cola has been one of Berkshire’s largest holdings since 1988.

Sparkling revenue, insane profit

Coca-Cola’s simple business generates very robust financial results. The company’s revenue has shown a compound annual growth rate (CAGR) of 6% over the past five years. Free cash flow saw a CAGR of 7% over the same period, while financial earnings averaged a growth rate of 10%.

In other words, Coca-Cola’s sales grow at a rate that beats inflation, and the business becomes even more profitable over time. Coca-Cola has some of the richest profit margins in the industry, well ahead of its rivals PepsiCo (NASDAQ: PEP) and Keurig Dr Pepper (NASDAQ: KDP).

And the company isn’t shy about sharing its cash profits with stockholders. Coca-Cola raked in $46.5 billion in revenue over the past four quarters, pocketing $9.1 billion in free cash flow along the way. It paid out $8 billion worth of dividends over the same time frame. With 400 million shares of Coca-Cola in its coffers, Berkshire Hathaway pocketed $766 million of that money — not bad for an initial investment of $1.3 billion. That’s an effective dividend yield of 59%, earned by holding the stock for decades.

Is Coca-Cola’s high valuation justified?

If Coca-Cola has a weak spot, it’s its high stock valuation. Shares are changing hands at 30 times trailing earnings and 6.8 times sales. By comparison, Pepsi stock is valued at 25 times earnings or 2.6 times sales, while Keurig Dr Pepper pods cost 24 times earnings and 3.3 times sales.

So you’re looking at a premium quality company whose stock trades at a premium valuation. The business delivers reliable but modest growth with sector-leading profit margins. This is a mature business, well located on the corner of Value Street and Robustness Boulevard. But high valuation ratios would be more appropriate for a smaller, hungrier growth stock. Coca-Cola’s valuation is indeed quite comparable to that of the faster-growing energy drink experts Monster Drink (NASDAQ: MNST) or Celsius Holdings (NASDAQ: CELH).

Data from Finviz.com on 09/03/2024. P/E = price to earnings. P/S = selling price.

The timing of the investment in Coca-Cola

So is it too late to buy Coca-Cola stock today?

The short answer is that it depends on your investment strategy. If you’re looking for the next hot growth stock or market value play, Coca Cola isn’t going to be your best bet. The company’s merits are already baked into the stock, and even Warren Buffett probably wouldn’t start a Coca-Cola position at these prices. Remember, he insists on buying great companies at a reasonable price. Coca-Cola only checks one of those two boxes today.

On the other hand, you should consider adding Coca-Cola to your portfolio if you’re interested in dollar cost averaging and other automated investment strategies. The company will be around for decades, always finding new ways to satisfy ever-changing consumer tastes. It’s not as safe as investing in a typical broad-market index fund, come rain or shine, but Coca-Cola is a reasonable pick for a basket of highly reliable handpicked stocks.