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Is Coca-Cola Stock a Buy?

Demitrios Kalogeropoulos, The Motley Fool

It's hard to overstate the strengths of Coca-Cola's (NYSE: KO) business. The beverage titan owns four of the world's top five soft drink brands and is responsible for more than half of all sales in that massive industry.

Meanwhile, its distribution system delivers 1.9 billion drinks to consumers in 200 countries around the world per day. It would take billions of dollars, and likely decades, for any rival to even hope to challenge that infrastructure.

Yet that dominant business hasn't created strong returns for investors lately, with shares trailing the broader market over the last three-year and five-year periods. Below, we'll look at the prospects for a better run for shareholders over the coming decade.

Brown soda and ice in a glass with a straw.

Image source: Getty Images.

Times are changing

Consumer tastes are shifting in ways that have clearly harmed Coke's business. People are passing on drinks they see as overly sweet or packed with artificial ingredients, and that move has created a difficult selling environment for the industry leader.

The Diet Coke brand booked a 5% volume decline in the U.S. last year, for example, as Coke's overall volume held flat. Compare that to National Beverage's 17% spike, powered by booming demand for sparkling soda brands like LaCroix.

Coke's earnings picture hasn't been bright, either. After adjusting for currency shifts, non-GAAP profit fell in 2015 and dropped again in 2016, before merely holding steady last year. At-home sparkling water specialist SodaStream, on the other hand, just managed its second straight year of record profitability.

Plan of attack

Coke isn't consigned to simply manage its slow decline. The company introduced more than 500 products last year that represented either entirely new brands or improvements to existing franchises. Its Coke Zero Sugar release was a highlight from that strategy and the new drink helped replace some of the losses from Diet Coke's stumbles. Bolt-on acquisitions are helping the company further tilt its portfolio toward the flavors that consumers are demanding in high-growth niches like tea, energy drinks, juice, and sparkling waters.

A woman drinking sparkling water from a glass.

Image source: Getty Images.

At the same time, Coke is pursuing a financial strategy that could supercharge earnings in the years ahead. With its refranchising and cost-cutting moves, management has increased profit margins while lowering the amount of capital needed to run the business.

Return on that capital, consequently, jumped by 1.6 percentage points to touch 19% of sales last year. CEO James Quincey and his team believe that's just the start though, and they're predicting higher margins in 2018, which they believe will be an inflection year for the business following several years of weakening financial results.

Can Coca-Cola turn things around?

Coke is expecting to speed sales growth up to 4% this year from 3% in 2017 even as profit margins improve. These two positive trends should support non-GAAP earnings growth of between 8% and 10% to mark the company's first gain by that metric in over three years.

As usual, investors can expect those returns to be supplemented by a growing dividend and significant share buybacks. Specifically, Coke should spend about $1 billion repurchasing its stock and its 5% dividend hike, announced in February, marked its 56th consecutive annual raise.

Put it all together and it wouldn't be surprising to see consistent returns in the low-double-digit range over the next few years. Investors could achieve higher rates with smaller soda specialists like National Beverage. But a Coca-Cola investment would deliver better predictability, conservative growth, and income. Shares won't soar as they have for both National Beverage and SodaStream over the past few years. But at 20 times expected earnings, compared to 27 for SodaStream and 21 for National Beverage, the beverage titan's stock should deliver decent investor returns from here.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of SodaStream. The Motley Fool has a disclosure policy.