It’s been a rough past few weeks for investors. Although stocks are up from last week’s low, the S&P 500 is still down quite a bit from July’s peak. It’s also possible that the market could make a lower low before all is said and done.
Not every ticker is on the defensive, though. A handful of stocks are at or near record highs, because investors understand these few names offer something that most other stocks don’t right now — relative safety — and so folks are filing into such companies just in case the recent market weakness is an omen.
Coca-Cola (NYSE: KO) is one of these names. And I’m buying more of it despite the recent run-up. Here’s why you might want to do the same.
Coca-Cola is the epitome of resilience
Coca-Cola is the world’s best-known beverage producer. Besides its namesake soft drink, it owns brands like Minute Maid juice, Gold Peak tea, Dasani water, and Powerade sports drink to name a few.
But it isn’t quite the company you might think it is. Although it used to do a great deal of its own bottling, it’s been increasingly delegating this to third-party bottlers that buy flavored syrups from Coca-Cola itself. While this ultimately means less revenue, it also means higher-margin revenue. Most important, this shift has freed up the company to focus on doing what it does best. That’s marketing.
But why is the stock rallying to record highs when most others are on the defensive? And more than that, can this uptrend last?
The answer to the first question: We might be entering a period of economic lethargy that actually works in the company’s favor.
The nation’s unemployment rate is starting to inch higher, and on a global basis, the International Monetary Fund is dialing back its expectations for near-term economic growth.
Consumers, however, are unlikely to give up their favorite beverages just because money could be getting tighter. In fact, it’s arguable that people will opt to enjoy these simpler, lower-cost treats more than they normally might if they’re no longer spending on bigger-ticket purchases. (For perspective, despite 2008’s subprime-mortgage meltdown and subsequent recession, Coca-Cola enjoyed an 11% improvement in revenue on a 5% increase in volume.)
As for the second question, yes, there’s room and reason to expect more progress from this stock even if we see a little profit-taking from here. It is still a bit below the analysts’ average price target of $70.73. Most of these analysts also still rate it as a strong buy.
That’s still not the chief reason I’m doubling down on Coca-Cola at this time, though.
A good time to become income-minded
There’s never a bad time to own Coca-Cola. It’s a brand consumers know and love, and management also clearly knows the beverage business. If nothing else, it’s not likely to do your long-term portfolio any harm.
My interest right now is far more specific, though. In anticipation of the aforementioned economic headwind, I’m looking to beef up my exposure to dividend-paying stocks. There might be none better than shares of Coca-Cola.
The forward-looking dividend yield of 2.8% isn’t exactly a showstopper; you can find higher yields with other holdings. You won’t find a higher-yielding pick that’s as reliable, though, or with a comparable risk profile. The stock’s beta, which measures volatility, is about as low as they come at 0.59 (the lower this number, the lower the volatility).
Consumers’ brand loyalty even when times get tough means they will keep buying Coke, Minute Maid, Gold Peak, etc., and the company will continue turning about one-fourth of its revenue into a net profit. In turn, it will continue earning more than enough to fully fund its future dividends. Of the $2.79 per share Coke earned over the past four quarters, only $1.91 of it was consumed by dividend payments. That’s a comfortable margin.
The kicker: Coca-Cola isn’t just a steady dividend grower, it has raised its annual dividend for 62 consecutive years. It’s not likely to let that streak be broken now.
You should also know that I’m not necessarily going to reinvest these dividends in more shares of Coca-Cola. I might instead build up a bigger stash of cash so I can go shopping in the event of a more serious pullback.
It seals the deal
Am I overpreparing for an economy that might never take shape? Possibly. But I’d rather play unnecessary defense with a quality company like Coca-Cola than stick with too much aggressive stuff and end up regretting it. Risk-management is an important part of being a successful investor, after all.
There’s also the simpler bullish argument that Coca-Cola is a quality holding regardless of the past or future backdrop. It has a long-term record of revenue and earnings growth that mirrors its dividend history.
So I’d say don’t overthink this one, and don’t sweat the stock’s recent extreme bullishness. Great stocks have a funny way of logging gains that don’t seem possible at the time.
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James Brumley has positions in Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Coca-Cola Stock Soars to a New Peak. Here’s Why I’m Doubling Down. was originally published by The Motley Fool
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