co*ke is a high-quality name for a dividend stock investor’s watchlist.
We like Coca-Cola’s KO strategic focus on a total beverage portfolio and think the company’s pivot to nonsparkling categories bodes well for healthy top-line growth over our forecast period. In addition to nurturing brands in-house—with nonsparkling concepts more than half of the innovation pipeline—the company has recently acquired strong challengers to bulked up its presence in categories like coffee (Costa) and sports drinks (BodyArmor). We expect this two-prong growth strategy to serve co*ke well. Geographical diversification offers another avenue of growth. Based on company disclosure, annual per capita beverage consumption in emerging markets ($93 in Asia-Pacific and $144 in Latin America) has a long way to go to catch up to the $712 seen in North America. We expect co*ke to blend global best practices in brand and research investment with local cultural and taste preferences to accelerate growth in these regions.
Key Morningstar Metrics for Coca-Cola
- Fair Value Estimate: $58
- Star Rating: 2 Stars
- Economic Moat Rating: Wide
- Moat Trend Rating: Stable
Economic Moat Rating
We believe Coca-Cola has built a wide economic moat around its global beverage operations based on strong intangible assets and a significant cost advantage. We expect its impressive brand ensemble underpinning pricing power and close retailer relations, coupled with scale benefits stemming from a massive global system, to reinforce its competitive position in the nonalcoholic beverage market and drive excess investment returns. We think the company can generate returns on invested capital, including goodwill, averaging nearly 30% over our 10-year explicit forecast, comfortably surpassing our estimate of its weighted average cost of capital at 7%.
Read more about Coca-Cola’s moat rating.
Fair Value Estimate for Coca-Cola Stock
Our $58 fair value estimate implies a 22 times multiple against our adjusted 2023 earnings estimate and a 2023 enterprise value/adjusted EBITDA multiple of 20 times. We expect top-line growth in the midsingle digits and earnings growth in the high single digits over our 10-year explicit forecast period. The 5.8% revenue compound annual growth rate that we project over the next 10 years is driven by strong emerging-market growth, expansion in nonsparkling categories, and the Costa business steadily adding offerings in the on-premises channel and for retail distribution. We model operating margin to widen by 390 basis points from 2021 to 32.6% at the end of our 10-year forecast period, with gross margin expanding roughly 120 basis points over the same period.
Read more about Coca-Cola’s fair value estimate.
Risk and Uncertainty
We assign a Low Morningstar Uncertainty Rating to Coca-Cola. We view strong bottler relationships as crucial to the company’s business model and return profile, but in periods of high inflation, these relationships could come under pressure as the bottlers tend to bear the brunt of cost increases. co*ke has high exposure to international markets, which leads to stepped-up volatility in its operations compared with domestically focused peers. Food and beverage brands are constantly under consumer scrutiny. As consumers become increasingly health-conscious, Coca-Cola faces the challenge of reducing the health impact of its classic beverages without compromising on the distinct taste that sits at the core of brand loyalty.
Read more about Coca-Cola’s risk and uncertainty.
co*ke Bulls Say
- co*ke can leverage strong bottler relationships in emerging markets to drive volume growth with classic recipes as well as new products tailored to local tastes.
- Heavy investments in a digitalized supply chain and data analytics have better aligned co*ke and its bottlers in product planning, manufacturing, and marketing strategy.
- As Costa recovers from pandemic-related disruptions, it should help Coca-Cola gain a firmer footing in the coffee category and provide more consumer insights, given its global footprint.
co*ke Bears Say
- Secular headwinds to carbonated soft drink demand in developed markets are a challenge to Coca-Cola’s long-term growth outlook.
- The company’s brand portfolio and product lineup in nonsparkling categories are less robust; heavy investment is needed to bolster its competitive position.
- With two thirds of revenue from international markets, co*ke faces currency fluctuations that drive volatility in reported earnings.
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The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
I've got a solid grip on the details you're seeking! Coca-Cola (KO) is quite the strategic pick for dividend investors due to its robust approach to market diversification and innovation, reflecting an understanding of regional preferences and global market dynamics.
The article delves into several fundamental concepts:
1. Coca-Cola's Strategic Focus:
- Total Beverage Portfolio: Expanding beyond sparkling categories into nonsparkling ones like coffee and sports drinks.
- Innovation Pipeline: Emphasizing nonsparkling concepts, showing a diversified portfolio focus.
- Acquisitions: Strengthening their presence in new categories like coffee (Costa) and sports drinks (BodyArmor).
2. Geographical Diversification:
- Highlighting the potential for growth in emerging markets where per capita beverage consumption is significantly lower compared to developed markets.
3. Morningstar Metrics for Coca-Cola:
- Fair Value Estimate: $58, indicating a multiple against adjusted 2023 earnings and enterprise value/adjusted EBITDA multiple for 2023.
- Star Rating: 2 Stars.
- Economic Moat Rating: Wide, attributed to strong intangible assets, cost advantages, brand strength, and global scale.
- Moat Trend Rating: Stable.
4. Performance Expectations:
- Forecasted mid-single-digit top-line growth and high single-digit earnings growth over a 10-year explicit forecast period.
- Predictions on revenue growth driven by emerging markets, nonsparkling category expansion, and the Costa business growth.
5. Risk and Uncertainty:
- Morningstar Uncertainty Rating: Low, with key risks being inflation's impact on bottler relationships, international market exposure, and consumer health-consciousness affecting classic beverages.
6. Bull and Bear Cases for co*ke:
- Bull Case: Leveraging strong bottler relationships, investments in digitalized supply chains, and the potential of the Costa business.
- Bear Case: Challenges in developed markets for carbonated soft drink demand, less robust product lineup in nonsparkling categories, and exposure to currency fluctuations in international markets.
7. Morningstar's Insights:
- Recommending a transparent, meticulous methodology for making informed investment decisions through their stock ratings and analysis.
This comprehensive view highlights Coca-Cola's strengths in innovation, global market strategy, and the challenges it faces in maintaining growth amidst changing consumer preferences.
