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The Sweet Dividend Alone Makes KO Stock Worth Another Look

Tezcan Gecgil

During the first quarter of 2019, Coca-Cola‘s (NYSE:KO) stock price has lagged many other stocks. Year-to-date, despite the impressive market rally in the broader market, Coca-Cola stock is down 1.5%.

Coca-Cola stock ko stock

Source: Coca-Cola

In comparison, the return on S&P 500 with the dividends reinvested would be almost 13%. Although its stock has not rewarded shareholders so far this year, I believe that the Coca-Cola belongs to a well-diversified portfolio.

Here is why:

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Coca Cola and Millennials

Coca-Cola is the world’s largest beverage company with 20 different brands that generate more than $31 billion dollars in annual revenues. Over the decades, many investors have regarded it as a reliable investment.

For example, Coca-Cola stock tops the list of longtime favorite holdings of Warren Buffett. The Oracle of Omaha’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owns 400,000,000 shares of Coca-Cola, worth over $18 billion. In the last quarter of 2018 when many stocks suffered sizable losses, KO was the only green stock among the top 10 holdings of Berkshire Hathaway.

However, most of this decade, KO has seen declining revenues, partly because of the drop in soda sales as the U.S. consumer has moved towards healthier beverages including flavored water.

Therefore, management has been transitioning the company to offer a beverage portfolio that seizes on the public’s increased appetite for flavored drinks, including colas. For example, in 2016, the company announced its “One Brand Strategy” and introduced a common visual identity and creative campaign for all the brands.

Later in 2017, it relaunched Coke Zero. This year, it introduced a U.S. wide ad campaign for its new flavor, Orange Vanilla Coke to coincide with March Madness. As a result of the changes in the product offerings, now cherry and vanilla flavored Cokes account for about 9% of the dollar volume but bring in 18% of the dollar growth.

Earlier this year, the group completed the acquisition of Costa Coffee in the U.K. Wall Street believes that the purchase of the biggest coffee chain in the U.K. could lead to increased diversification away from soda drinks as well as revenues, especially prompted by growth in the Chinese market, where Costa Coffee currently has almost 500 stores.

Offering hot beverages for the first time is yet another strategic step for the group as it addresses the shift in consumer taste and purchasing behavior.

As you are deciding what may be next for KO stock fundamentally, you may also want to think about whether the global economy or the U.S. may be headed for a slowdown or even a recession.

During periods of market volatility or economic downturn, consumer staples tend to be among the last products that consumers remove from their household budgets. In other words, defensive stocks like KO may help your portfolio when the going gets tough in the markets.

On the flip side of the coin, despite the recent decline in the stock price, Coca-Cola shares still seem expensive when compared to the five year trading history. In mid-March, the stock also was downgraded from $64 to $50.  Therefore, some analysts urge investors to consider KO stock’s peers, such as PepsiCo (NYSE:PEP).

Nonetheless, over the past decade, the returns of both stocks would have been very similar; in fact KO investors would have been slightly better off than PEP shareholders.

Reinvesting the KO Stock Dividend

Income investors know that they can compound their returns through reinvesting dividends from high-yielding shares. Despite the question marks regarding future growth at Coca-Cola, its dividends make the shares rather attractive. In February, the company increased its dividend and declared a new share buyback program.

The current dividend yield stands at 3.5% – another reason why I believe KO stock belongs to a capital-growth portfolio. The next dividend payment is scheduled for Apr. 1, 2019 to shareholders of record on Mar. 15.

KO Stock in the Short Term

Following the sell-off on Feb. 14, Coca-Cola stock has been range trading between $44.5 and $46.5. This band is likely to act as a strong support zone for the stock where it can form a base to make a new sustained leg up.

Those investors who pay attention to moving averages and oscillators should note that the short-term technical message is giving “neutral-to-buy” readings.

I would not advocate bottom-picking in case of near-term price weakness. Yet, I find KO stock to be a compelling buy candidate and I’d regard any potential dip in the price as an opportunity to grab the shares for the long term. Within a year, I’d expect the shares to trade slightly over $50.

If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a three-month time horizon. In that case, you may, for example, buy 100 shares of Coca-Cola at a limit price of $46.61 (the closing price on Mar. 27) and, at the same time, sell a KO June 21 2019 $47 call option, which currently trades at $1.15.

The $47 option is slightly out-of-the-money, offering some downside protection in case of volatility and a decline in KO stock. This call option would stop trading on Jun. 21, 2019 and expire on Jun. 22.

The Bottom Line on Coca-Cola Stock

After considering the pros and the cons for the stock, if you are also of the opinion that the management will be able to strengthen the story of Coca-Cola, the iconic beverage company, and its balance sheet and that the stock is ready for a rebound on either technical and fundamental grounds, you may want to add KO shares to your portfolio in the second quarter of 2019.

In 3-4 years, patient value and dividend growth investors are likely to be rewarded handsomely.

In case you do not want to own Coca-Cola stock by itself, but would rather invest on a sectoral basis, you may also consider an exchange traded fund (ETF) that holds KO,  such as the Consumer Staples Select Sector SPDR (NYSEARCA:XLP) or the Invesco Dynamic Food & Beverage ETF (NYSEARCA:PBJ). Or you could even consider investing in Coca-Cola indirectly by owning shares of Berkshire Hathaway.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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