If you’re thirsty for a value investing idea that’s likely to weather market volatility and recessions, consider Coca-Cola Co. (KO, Financial).
Rated a buy, this company is a favorite of the Oracle of Omaha Warren Buffett (Trades, Portfolio), who reportedly likes Cherry Coke. The company he leads, Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), owns a 9% stake.
Let’s look at the pros and cons of Coca-Cola and whether it’s a bubbly addition to value portfolios in 2022.
The pros
One of the advantages of owning Coca-Cola is it has a near-monopoly. Like the company's old slogan trumpets, it’s the real thing. There’s something about the original Coke, Diet Coke or Coke Zero that’s different than other cola brands. Customers recognize that and will return to buy Coke again and again. Not only that, but Coca-Cola is nearly three times as big as its closest competitor. Finding a company that’s a profitable industry leader is a key tenet of value investing.
Second, the company is recession-proof or close to it. While we’re not in a recession right now, it’s always a good idea to look for stocks of companies that won’t sink the minute a downturn happens. Coca-Cola is one of those. Buying a soft drink is one of those affordable treats that you’ll do even when money is short. You might even drink a soft drink more often in a downturn since it’s a more affordable choice than a craft beer or glass of wine with dinner or at the end of the day.
Coca-Cola is also profitable. If you’re looking for profits, have a Coke and a smile. Over the past decade, the stock has increased in share price by more than 11% and it has a dividend yield of 2.59%. It’s outperforming the market by a wide margin. Coca-Cola gets an 8 out of 10 profitability score from GuruFocus.
Finally, the company is growing. Value investing should focus on companies that are profitable and poised to keep growing. Coca-Cola is seeing a 34% increase in Latin American sales and is up 13% in Europe and the Middle East. Emerging markets are showing promise for Coca-Cola.
The cons
There are a few concerns in buying shares of Coca-Cola.
The first is competition. High-growth sectors such as water and bottled coffee are areas where Coca-Cola faces the most competition.
Another disadvantage is its products are mostly sodas. Coca-Cola is still a soda company by and large, which might make it overexposed to the drink sector if consumers’ tastes change. Market research shows that consumers are buying fewer sugary sodas these days.
Last but not least, the stock is expensive. Coca-Cola has a price-earnings ratio of 27.78, which makes it a little on the expensive side, given its risks.
The bottom line
If you’re looking for a stock to hold for a while, Coca-Cola could be a good choice if you also have a mix of other stock sectors. It will likely face challenges in consumers’ changing tastes and competition, but the company has a healthy dividend yield and solid financials. Check exchange-traded funds for holdings of Coca-Cola to make sure you're not overexposed if you pick up the stock on the way home.
