This dividend king is trading at record highs. Is it too late to buy the stock?

Established giants of the industry do not usually make the cut for exciting and hyped-up actions. But the investors were loving Coca cola (K.O 0.55%) this year. The drinks giant is up 21% year-to-date, beating S&P 500 and hitting new records along the way.

Is it too late to buy the stock?

The model

Although Coca-Cola has been an industry leader for a long time, it has gone through changes that have affected it in powerful ways. CEO James Quincey came on board in 2018 when sales were slowing and it looked like the company might be losing ground. It also had to deal with a global pandemic and restructured the company to make the most of its unrivaled distribution network. Coca-Cola cut its number of brands in half (to about 200) and launched drinks in new sizes and types of bottles. It successfully raised prices to offset the effects of inflation and grew its revenues and profits despite years of economic turmoil.

Revenue rose 3% year-over-year in the second quarter, while organic revenue rose 15%. Operating margin increased from 20.1% a year ago to 21.3%, while adjusted operating margin increased from 21.6% to 32.8%.

Because of its size, reach and distribution channels, Coca-Cola has a model that lends itself to growth and efficiency. Although it got rid of half its brands, they were mostly small, local names that accounted for a small share of sales and volume. However, it still acquires global brands that can add scale, and since 2006, eight of its billion-dollar brands have come from acquisitions.

Once a new brand enters Coca-Cola’s distribution system, the company can use its vast store of data to identify where it should go and use its strong channels to get products to the right places faster and cheaper than he could have scored on his own. . This creates higher sales for Coca-Cola at more profitable levels.

Revenues finally reached record levels after falling for several years prior to Quincey’s tenure. It makes sense that investors are once again excited about this business.

The opportunity

If investors are worried about future growth, management says it’s “amazed” by the opportunity it has. Although Coca-Cola is already the largest beverage company in the world, it is not the only player and sees significant potential in gaining market share. Even though Coca-Cola maintains its market share without expanding it, the industry has grown by about 5% to 6% annually in recent years.

But it plans to gain more market share through a deliberate innovation strategy. It has a three-pronged approach focused on coffee brands, emerging brands and energy brands. That’s in addition to Coca-Cola’s core beverage brands and regular ready-to-drink categories like juices and dairy.

Management sees “limitless combinations” to drive higher sales as it reaches global markets and creates new products at different price points.

DIVIDENDS

Coca-Cola pays a healthy dividend that typically yields around 3%. At the current price, the shares are yielding 2.7%. It’s also a dividend king that has raised its dividend annually for the past 62 years, and the dividend is solid. Management has paid and raised it in all kinds of circumstances over the decades. Even during the pandemic, management said it was fully committed to dividends, even as the payout ratio exceeded 100%.

Warren Buffett praised Coca-Cola as a stock he would never sell, and a great dividend is one of his signs of a great stock to own.

stock

Although Coca-Cola stock is trading near record highs, its price-to-earnings (P/E) ratio remains close to its five-year average. The rising stock price doesn’t mean Coca-Cola’s valuation has become too expensive.

Data by YCharts.

Coca-Cola may not offer the same opportunities as a young growth stock, but it has plenty of opportunities to expand its reach while being a reliable source of passive income. If this fits your investment profile, it’s not too late to buy Coca-Cola stock.