After an uncharacteristic 13% decline over the past month, shares of Coca-Cola are hovering just above their 52-week low. Before this recent downturn, Coca-Cola was one of the few high-profile stocks enjoying a gain in 2022.
It looks like a surging dollar has finally caused the shares to sell off as this global giant derives about two-thirds of its revenue internationally. Here's why the decline makes for a buying opportunity for this blue-chip stock.
Playing defense
While the current sell-off is certainly not fun for shareholders, the company's overall performance this year has burnished its reputation as a defensive stock. Coca-Cola is down 7% year to date, but it is vastly outperforming the broader market. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are all in bear market territory, down 20%, 24.5%, and 33% respectively.
This outperformance during a time of turmoil shows the value of a stock like Coca-Cola. Holding a dominant consumer staples blue-chip like Coca-Cola can help investors preserve capital during a market downturn. People buy products like Coke and Diet Coke on a frequent basis, and are unlikely to change their habits because of a recession or market downturn. The market recognizes this stability and gives Coca-Cola credit for it.
Ramping up shareholder returns
Just as surely as you can count on seeing Coca-Cola commercials featuring the iconic polar bears drinking Cokes come Christmastime, you can count on Coca-Cola to increase its dividend like clockwork each and every year. The company has a dividend track record that's hard to match.
After increasing its quarterly dividend by about 5% this past February, Coca-Cola has now increased its annual dividend payout for 60 years in a row, making it not only a Dividend Aristocrat, but also a Dividend King. The company paid out a whopping $7.3 billion in dividends to shareholders in 2021, and has paid out over $70 billion since 2010. Shares of Coca-Cola yield about 3.2% on a forward basis.
One thing to keep in mind with Coca-Cola's dividend is that its dividend payout ratio is now 80%. This is a bit higher than investors typically want to see, and while it does not mean that Coca-Cola's dividend is in any danger (the company has plenty of cash on its balance sheet), it could limit how much Coca-Cola will increase its dividend payout, and it leaves it with less flexibility if earnings decline.
Beyond dividends, Coca-Cola also said it would resume share repurchases in 2022, and that it could buy back up to $500 million worth. In the second quarter alone, the company bought back $461 million. While this isn't a major share repurchase program for a company with a $250 billion market cap, it's good to see Coca-Cola resuming buybacks and the dividend plus share repurchases all add to incremental returns for investors.
Old dog, new tricks
Coca-Cola may be a 130-year-old company, but that doesn't mean that this old dog can't learn new tricks. It recently teamed up with Molson Coors Beverage to launch alcoholic drinks like the trendy Topo Chico Ranch Water Hard Seltzer as well as Simply Spiked Lemonade. The company also linked up with Brown-Forman to launch a pre-made ready-to-drink version of the famous Jack and Coke cocktail.
Market research firm ISWR found the ready-to-drink cocktail segment grew by 51% in 2021, far outpacing the growth of the overall alcoholic beverage industry. Now, Coca-Cola is ramping up its relationship with Molson Coors and building on the success of the Topo Chico Hard Seltzers to launch Topo Chico Spirited, which will come to 20 U.S. markets next year.
Topo Chico Hard Seltzer has been a major success for Coca-Cola and Molson Coors, with Molson-Coors CEO Gavin Hattersley stating that Topo Chico Hard Seltzer's share of the U.S. hard seltzer market grew to over 9% during the second quarter. Furthermore, market research company IRI finds that Topo Chico Hard Seltzer is the fastest-growing hard seltzer brand over the past year.
Buy the dip on Coca-Cola
Coca-Cola is a blue-chip stock that has proven its defensive credentials over the past year. The company has preserved its shareholders' capital at a time when many stocks have endured heavy losses. The company has a stellar dividend track record and is buying back shares again, and my only concern in this area is the high dividend payout ratio.
The beverage king has demonstrated a strong ability to iterate on its product lineup and launch successful new products like Topo Chico Hard Seltzer and Simply Spiked Lemonade. Coca-Cola is expected to increase earnings by 7% this year and 5% next year, so it keeps chugging along at a time when some companies are worried about earnings declining.
It's rare to get the chance to buy a powerhouse like this near its 52-week low, making this a good time to add shares of Coca-Cola to your portfolio as a long-term holding.
