As a further sanction against Russia due to its invasion of Ukraine, the U.S. threatened on Monday to stop imports of Russian crude oil. This led to a rapid climb in the price per barrel, raising serious concerns about the impact on inflation in the coming months. As a reaction to this, most stocks on the world stock exchanges were clearly in the red.
It is almost certain that the prices of goods and services will continue to rise in the coming months as companies pass higher energy prices on to consumers. Some faster, some slower, but all will raise prices, prompting analysts to revise the inflation rate for March up about 50 basis points from the previous estimate of 7.5%.
This month, the U.S. Federal Reserve will proceed with the first of a series of rate hikes announced by Chair Jerome Powell in late 2021 to counter record inflation, which could be more aggressive than forecasted. This creates the risk of a dangerous slowdown in economic growth, with the next cycle characterized by higher prices combined with stagnation in economic activity.
Should lower purchasing power and tighter monetary policy lead to a decline in corporate sales and profits, macroeconomic conditions will likely pave the way for a prolonged downturn for at least 50% of the overall U.S. market.
As a result, investors are targeting defensive stocks, looking for companies that can make the portfolio more resilient to the negative effects of potential stagflation.
This is certainly the case with The Coca-Cola Co. (KO, Financial) as the company sells a product that has been in demand by consumers for generations, is known and distributed in every corner of the planet and is consumed daily.
The storied soft drink stock is strongly positioned to outperform the consumer defensive sector, which has fallen over 10% so far this year as traders' attention turned to energy stocks to take advantage of skyrocketing oil and gas prices.
Aside from the main feature of defensive stocks, Coca-Cola will also benefit from the ongoing resumption of activity from the Covid-19 crisis as consumers return to restaurants, pubs and bars where its products are available.
Strong upside potential for the stock could come from the top line. If the company makes certain strategic changes, the results could be seen in revenue growth that exceeds not only the company's expectations (based on long-term forecast models) but also analysts' best estimates.
Organic sales growth of 7% to 8%, as the company expects for full-year 2022, should provide a solid foundation for a no less than 8% increase in adjusted earnings per share of $2.44 to $2.46 in 2021.
Shareholders should also benefit from the impressive 26% year-over-year increase in free cash flow that Coca-Cola expects for full-year 2022, as it gives the company more flexibility in pursuing its growth strategies.
The soft drinks giant will also have more leeway to strengthen its balance sheet, giving shareholders more hope for higher quarterly dividends while benefiting from the share buyback program Coca-Cola plans to resume this year. Both events help shares trade higher.
The company has been paying dividends for 59 straight years, growing them by an average of 6% annually over the past decade.
The stock closed at $61.08 on Monday for a market cap of $264.81 billion, a trailing 12-month dividend yield of 2.75% (versus the S&P 500’s yield of 1.44%) and a 52-week range of $50.17 to $63.02.
The stock price is slightly above the 50-day moving average of $60.79, so it is not expensive based on this metric. The company is well positioned to outperform the broader market going forward.
Wall Street issued a median recommendation rating of buy and established an average target price of $67.4 per share.
