Coca-Cola is up nearly 30% over the past year, and investors are clearly in the mood to buy the beverage giant during a bull market. Should I do that?
Investors are in a buying mood for Coca-Cola (KO 0.46%), with the stock up about 30% over the past year. This is in line with the S&P 500 index (^GSPC 0.61%) as the bull market pushed the market higher. Can Coca-Cola help you become a millionaire? Of course it can! However, there are some caveats you should keep in mind right now.
What does Coca-Cola do?
Good business is the basis of investments that create millionaires. Coca-Cola is definitely doing good business. The company is the world’s leading non-alcoholic beverage company, with many iconic brands including Coke, Costa Coffee, Fanta and Minute Maid. The company’s brands are sold in more than 200 countries and territories.
Image source: Getty Images.
With a market capitalization of approximately $300 billion, this behemoth has the financial and brand power to support an extensive distribution network, product innovation, and marketing apparatus that few other companies can match. You can also expand your portfolio by acquiring small businesses, which can benefit from your distribution and marketing strengths.
Perhaps the biggest evidence of Coca-Cola’s success is its dividend, which has increased annually for 62 consecutive years. This makes Coca-Cola the dividend king. Building a record like this doesn’t happen by chance. You need to maintain consistently strong performance, both operationally and financially.
There’s a reason Coca-Cola has been part of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) stock portfolio for so long. Even the oracles of Omaha love Coke! (To own and drink, so to speak.) But there’s a wrinkle here that you need to understand before you run out of Coca-Cola and add it to your portfolio.
Buffett buys stocks during sales
Buffett’s investment approach speaks for itself. Simply put, he likes to buy well-run companies when they’re on sale. And they prefer to hold them for the long term to benefit from business growth over time. He didn’t just add Coca-Cola to his portfolio. It’s been there for decades. But you’re now considering Coca-Cola stock. And it’s also a problem in terms of evaluation.
Traditional valuation metrics indicate that the stock is currently a bit overvalued. The price-to-sales ratio has remained at around 6.4x, compared to the five-year average of 6.2x. The price-to-earnings ratio is approximately 28 times, while the long-term average is 26 times. The price-to-book ratio is approximately 11.5 times, but the five-year average is close to 11 times. Dividend yield, a less traditional valuation tool, is 2.8%, compared to a five-year average of 3%. Overall, Coca-Cola looks a little expensive right now.
KO data by YCharts
That doesn’t mean Coca-Cola isn’t doing well. Quite the opposite. Over the past five years, revenue has grown at about 7.5% per year, and profits have grown by about 10% each year. There’s a reason investors are buying this stock during a bull market. But that doesn’t mean you have to follow the pack. Coca-Cola is probably best left on the wishlist for now and waits for the market decline to bring valuations back to more attractive levels.
It’s a good company. Not that good price.
Coca-Cola could very well help investors build a seven-figure nest egg over the long term. But paying too much can hinder that ability and set you back from your quest for financial independence, at least temporarily. That being said, if you like Coca-Cola as a company, you should start planning to buy it now. When the time is right to buy this well-run drinks giant, you’ll need the fortitude to stand up to the crowd that will likely sell it as a market tinderbox. Planning will help you do that. And if you are patient and focus on buying Coca-Cola when it’s cheap, your chances of achieving millionaire status will greatly increase.
