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In an unexpected turn of events, shares of Coca-Cola (KO 1.57%) have surged by 17% since the beginning of the year, maintaining a steady position close to its 52-week peak of $73.95, which it hit on April 3.
This strong performance stands out against the backdrop of recent stock market turbulence that has affected many other companies. Coca-Cola, however, has demonstrated resilience, bolstered by its solid operational results in 2024.
In light of the rising stock price, shareholders may be wondering what steps to take next: should they buy, sell, or hold? Let’s explore the current landscape.
Growth Trajectory of Coca-Cola
Following a challenging period during the COVID-19 pandemic, Coca-Cola has shown significant growth in its business metrics. Notably, the company posted a 6% increase in revenue for the fourth quarter of 2024, totaling $11.5 billion, while its earnings per share (EPS) climbed by 12%, reaching $0.51.
This quarter’s growth is part of a broader trend, as the company has consistently improved its financial performance in the years following the declines experienced during the pandemic.
Coca-Cola’s growth strategy, as articulated by CEO James Quincey, focuses on enhancing product availability, increasing customer engagement, and leveraging marketing initiatives. “Our system recruited weekly plus drinkers, grew volume, and won share in 2024,” Quincey stated, highlighting the role of innovative cold drink equipment in driving consumption. Coca-Cola’s fleet includes 14 million cold drink units, which the company intends to expand further. These machines are equipped with internet connectivity to provide real-time sales diagnostics.
Reliable Passive Income Streams
A key factor behind Coca-Cola’s stock performance has been its impressive free cash flow (FCF), which totaled $4.7 billion at the end of 2024. Had it not been for significant tax payments, the FCF would have reached $10.8 billion – a $1 billion increase from the previous year. This cash flow is crucial as it indicates the company’s ability to reinvest in its business, service debt, repurchase shares, and distribute dividends.
The robust FCF supports Coca-Cola’s dividend policy, which currently offers a yield of 2.8%. Despite a substantial tax payment in 2024, this was an isolated occurrence, allowing for a healthy total of $8.4 billion in dividends. The company also raised its dividend in February, marking an impressive 63 consecutive years of increases, with projections of FCF reaching $9.5 billion in 2025.
In an environment of economic uncertainty, particularly related to fiscal policies, Coca-Cola’s consistent dividend payments enhance its attractiveness as an investment. In scenarios where stock prices remain stagnant or decline, the dividend yield can provide a safety net for investors.
For current shareholders, retaining their Coca-Cola shares might be the most prudent course of action. Given its long-term trajectory of dividend growth and solid cash flow generation, Coca-Cola stands to continue delivering reliable passive income.
Investment Considerations for Coca-Cola Stock
For those contemplating the purchase of Coca-Cola stock, it’s important to weigh the current valuation against that of its major competitor, PepsiCo. The price-to-earnings (P/E) ratio serves as a common benchmark for assessing stock valuations, indicating how much investors are prepared to pay for each dollar of earnings.
A year ago, Coca-Cola’s stock traded at a lower valuation compared to PepsiCo. However, the recent uptick in Coca-Cola’s share price has altered this dynamic. Currently, Coca-Cola’s P/E ratio is close to 30, considerably higher than PepsiCo’s approximately 21, suggesting that Coca-Cola shares may be overvalued compared to their rival.
As such, for those interested in investing, it may not be the ideal moment to buy Coca-Cola stock. Instead, potential investors might consider placing the stock on a watch list and await a more favorable price point before making any commitments.
Source
www.fool.com