Coca-Cola’s stock has been a strong performer over the past six months, climbing 15.6% to $72.40 per share while the S&P 500 remained flat. The company’s solid quarterly results have prompted investors to consider their next move. Despite the recent momentum, there are several reasons why investors might want to reconsider holding Coca-Cola.
The company’s long-term revenue growth has been modest, with sales growing at a 5.4% compounded annual rate over the last three years, which is below expectations for the consumer staples sector. Wall Street analysts expect Coca-Cola’s revenue to rise by just 4% over the next 12 months, suggesting that its newer products will not significantly boost its top-line performance. Additionally, the company’s free cash flow margin dropped by 23.7 percentage points over the last year, currently standing at a negative 2% for the trailing 12 months.
While Coca-Cola isn’t a bad business, its shares trade at 24× forward P/E, indicating that a lot of good news is already priced in. Investors might find better opportunities elsewhere, such as in companies like Nvidia and Exlservice, which have performed remarkably well over the past five years. One alternative to consider is PepsiCo, a direct competitor to Coca-Cola and also a Dividend King.
PepsiCo’s price-to-sales and price-to-earnings ratios are below their five-year averages, and its yield is toward the high end of its historical range, making it look cheap compared to Coca-Cola.
Coca-Cola momentum and future outlook
PepsiCo also stands out on the diversification front, operating in the salty snack and packaged foods spaces in addition to beverages.
This gives the company more levers to pull to support long-term growth and more businesses to lean on when one of its divisions is facing difficulty. While Coca-Cola is performing well today, PepsiCo is facing some near-term headwinds, which is why its yield is a historically high 4.3% and its stock price has lost a third of its value since early 2023. However, PepsiCo is leaning on its successful playbook and buying smaller brands that are more relevant with consumers right now, which should help the company get back on the growth track in time.
Looking ahead, it’s uncertain if Coca-Cola stock will outperform the market in the next five years, but its appeal lies in its stability and dividends. The company has a history of being a steady anchor during uncertain economic times and is likely to maintain its position as the largest beverage company globally. Coca-Cola’s CEO, James Quincey, has steered the company into a stronger position, enabling it to demonstrate rapid growth and withstand financial pressures.
The company’s business model effectively leverages its core branded beverages while acquiring new brands to boost revenue, and it continuously releases new flavors and innovations to stimulate demand. For investors looking for reliable income and a steady presence in their portfolios, Coca-Cola remains a solid choice. The company is renowned for its dependable and growing dividend, having raised it for 63 consecutive years, and it is highly likely to continue this trend over the next five years.