Is Coca-Cola Stock a Buy After a Dividend Increase?

We like Coca-Cola’s KO strategic focus on a total beverage portfolio and think the company’s pivot to nonsparkling categories bodes well for healthy top-line growth over our forecast period. In addition to nurturing brands in-house—with nonsparkling concepts more than half of the innovation pipeline—the company has recently acquired strong challengers to bulked up its presence in categories like coffee (Costa) and sports drinks (BodyArmor). We expect this two-prong growth strategy to serve Coke well. Geographical diversification offers another avenue of growth. Based on company disclosure, annual per capita beverage consumption in emerging markets ($93 in Asia-Pacific and $144 in Latin America) has a long way to go to catch up to the $712 seen in North America. We expect Coke to blend global best practices in brand and research investment with local cultural and taste preferences to accelerate growth in these regions.

Key Morningstar Metrics for Coca-Cola

• Fair Value Estimate: $58
• Star Rating: 2 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Economic Moat Rating

We believe Coca-Cola has built a wide economic moat around its global beverage operations based on strong intangible assets and a significant cost advantage. We expect its impressive brand ensemble underpinning pricing power and close retailer relations, coupled with scale benefits stemming from a massive global system, to reinforce its competitive position in the nonalcoholic beverage market and drive excess investment returns. We think the company can generate returns on invested capital, including goodwill, averaging nearly 30% over our 10-year explicit forecast, comfortably surpassing our estimate of its weighted average cost of capital at 7%.

Read more about Coca-Cola’s moat rating.

Fair Value Estimate for Coca-Cola Stock

Our $58 fair value estimate implies a 22 times multiple against our adjusted 2023 earnings estimate and a 2023 enterprise value/adjusted EBITDA multiple of 20 times. We expect top-line growth in the midsingle digits and earnings growth in the high single digits over our 10-year explicit forecast period. The 5.8% revenue compound annual growth rate that we project over the next 10 years is driven by strong emerging-market growth, expansion in nonsparkling categories, and the Costa business steadily adding offerings in the on-premises channel and for retail distribution. We model operating margin to widen by 390 basis points from 2021 to 32.6% at the end of our 10-year forecast period, with gross margin expanding roughly 120 basis points over the same period.

Read more about Coca-Cola’s fair value estimate.

Risk and Uncertainty

We assign a Low Morningstar Uncertainty Rating to Coca-Cola. We view strong bottler relationships as crucial to the company’s business model and return profile, but in periods of high inflation, these relationships could come under pressure as the bottlers tend to bear the brunt of cost increases. Coke has high exposure to international markets, which leads to stepped-up volatility in its operations compared with domestically focused peers. Food and beverage brands are constantly under consumer scrutiny. As consumers become increasingly health-conscious, Coca-Cola faces the challenge of reducing the health impact of its classic beverages without compromising on the distinct taste that sits at the core of brand loyalty.

Read more about Coca-Cola’s risk and uncertainty.

Coke Bulls Say

• Coke can leverage strong bottler relationships in emerging markets to drive volume growth with classic recipes as well as new products tailored to local tastes.
• Heavy investments in a digitalized supply chain and data analytics have better aligned Coke and its bottlers in product planning, manufacturing, and marketing strategy.
• As Costa recovers from pandemic-related disruptions, it should help Coca-Cola gain a firmer footing in the coffee category and provide more consumer insights, given its global footprint.

Coke Bears Say

• Secular headwinds to carbonated soft drink demand in developed markets are a challenge to Coca-Cola’s long-term growth outlook.
• The company’s brand portfolio and product lineup in nonsparkling categories are less robust; heavy investment is needed to bolster its competitive position.
• With two thirds of revenue from international markets, Coke faces currency fluctuations that drive volatility in reported earnings.

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