This business has been a favorite of Warren Buffett's for quite some time.
With its popular drinks being sold in 200 countries across the world, Coca-Cola (KO -0.46%) is without a doubt one of the strongest and most widely recognized brands on Earth. The business has been around since the late 1800s, showcasing just how durable demand is over long periods of time.
The average investor might have their eyes on this beverage stock because Warren Buffett-led Berkshire Hathaway is a large shareholder. The Oracle of Omaha's track record speaks for itself.
But is Coca-Cola a no-brainer dividend stock for you to buy below $65? Let's take a closer look.
Dominating the industry
In 2023, the business raked in $45.8 billion in revenue. It has 46% market share in the non-alcoholic, ready-to-drink (NARTD) category in the U.S., well ahead of smaller rival PepsiCo.
There's no question that the key ingredient to Coca-Cola's success is the brand. Consumers can get soft drinks from an unlimited number of companies, but this one has been around for such a long time, consistently delivering for its end users and their cravings. A powerful brand that resonates with consumers leads to tremendous loyalty.
This results in steady demand throughout economic booms and downturns. Revenue held up well throughout the Great Recession. I believe that shows that even when times get tough, people will still buy these beverages.
Investors should appreciate Coca-Cola's ability to register consistent profitability. Its gross margin and operating margin have averaged a phenomenal 60% and 26%, respectively, in the past decade.
The business generates tons of free cash flow, to the tune of $9.7 billion in 2023. Even after investing in capital expenditures, there are a lot of resources left to fund dividends. The current 3.2% yield is healthy. But even more impressive, Coca-Cola has increased its annual dividend payout in 62 straight years.
I see no reason to believe this trend won't continue. Investors who care most about generating income from their investment can do a lot worse than buy Coca-Cola shares.
Can the stock beat the market?
It's a different story for those investors who are trying to identify stocks that can outperform the S&P 500 or the Nasdaq Composite Index over the long term. If this describes you, you should think twice.
Yes, Coca-Cola shares trade below $65, and they are 9% off of their all-time high. However, there are two important reasons why I believe this stock doesn't make for a smart investment for those seeking high returns.
One factor to consider is Coca-Cola's growth potential. In the past 10 years, revenue has basically remained flat. And according to Wall Street consensus-analyst estimates, the business will generate $51 billion in sales in 2026, representing just a 10% increase compared to 2023.
This points to just how mature the NARTD category is. I'd suspect this industry's revenues won't increase much faster than GDP or population growth. As a scaled operator with a presence all over the globe, this leaves almost no sizable expansion opportunities for Coca-Cola.
On its own, limited growth prospects might not be enough of a reason to completely pass on the stock. But what about the valuation?
Investors are being asked to pay a price-to-earnings (P/E) ratio of 24.3 to buy shares right now. That's below their trailing-five-year average. However, it represents a premium to the broader S&P 500.
It doesn't seem like a smart move to pay a steep valuation for this business. Even including dividends, the stock has severely underperformed the broader index since April 2019. I expect this to continue.
Investors who want to beat the market shouldn't buy shares. But again, income investors might want to take a closer look at Coca-Cola.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
