Investors probably want to follow in Warren Buffett’s footsteps and own this stock.
With a sales presence in more than 200 countries and territories across the globe, as well as top beverage options like its namesake soft drink, Dasani water, and Powerade sports drink, among many others, Coca-Cola (KO -0.69%) is certainly a household name. Its long-term success and relevance have helped create a business that’s currently worth $309 billion.
But could investing $10,000 today in this top beverage stock eventually make you a millionaire? Continue reading to learn more about Coca-Cola’s investment merits.
Coca-Cola is a high-quality business
One key reason that this company is probably on your radar is that it’s a high-quality enterprise. For starters, Coca-Cola possesses one of the world’s strongest and most recognizable brands. This has been developed over more than a century of satisfying customers and delivering a consistent product.
The company’s brand moat helps support its pricing power. Just in the latest quarter (the second quarter ended June 28), Coca-Cola posted 3% net revenue growth, but it was offset by more favorable pricing actions that were taken by the management team. Customers definitely have loyalty to the company’s products.
I’ll also draw attention to Coca-Cola’s financial situation. This is an extremely profitable business. In the past decade, its operating margin has averaged a superb 26.6%. This results in tremendous free cash flow that supports a consistent dividend (more on this below).
Coca-Cola operates in a mature, boring, and stable industry. The smartest and most funded entrepreneurs aren’t exactly working hard to disrupt the market. But that’s a good thing. It means that this business faces almost no threat of disruption. If we look out 50 years from now, there’s a very high probability that Coca-Cola will still be atop the industry.
There aren’t many investors who would argue against the viewpoint that Coca-Cola is a wonderful business. Even Warren Buffett agrees. Berkshire Hathaway, the massive conglomerate he runs, owns 9.3% of the beverage giant’s outstanding shares. It has been a position in the portfolio for a very long time and generates huge dividend payouts every year. This certainly provides a stamp of approval for anyone looking to scoop up Coca-Cola stock.
Coca-Cola’s return potential
Coca-Cola’s high level of consistent profitability supports its 2.7% dividend yield. The business has actually increased its payout for a jaw-dropping 62 straight years. The consistent dividend provides investors with a steady source of income. And this helps contribute to the stock’s return potential.
However, another factor to consider is the valuation. As of this writing, the stock trades at a price-to-earnings ratio of 29.1. This represents a premium to the past five-year average. And it’s 21% more expensive than the overall S&P 500 index.
Paying the current valuation makes sense, but only if you have the conviction that Coca-Cola will grow its bottom line rapidly going forward. It’s easy to be skeptical in this regard. In the past decade, its earnings per share have climbed at an annualized rate of just 2.7%. This is a low-growth business that operates in a very mature industry. Therefore, investors must be mindful of where the returns from owning this stock will come from.
In the past five years, Coca-Cola produced a total return of 54%. For comparison’s sake, the S&P 500 would’ve more than doubled your initial capital outlay. I see no reason to expect the company’s underperformance of the S&P 500 to change as we look ahead.
Assuming Coca-Cola’s trailing-five-year annualized return of 9% continues indefinitely, it would take more than 50 years for an initial $10,000 capital outlay to turn into $1 million. So, it’s probably best for investors to look elsewhere if the hope is to get to the seven-figure club in a more reasonable time frame.
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.
