Beverage giant Coca-Cola Co. (KO, Financial) reported earnings results in the middle of February that were very positive. Organic growth for the quarter was well above already very high estimates. The company also recently announced a dividend increase to extend its impressive dividend growth streak.
Shares of the company are down over the last year, but still ahead of what the S&P 500 Index has returned as the index is lower by more than 9% over this period of time.
This discussion will examine why the positive earnings story, including an outlook for 2023, makes the stock appealing.
Earnings highlights
Coca-Cola reported fourth-quarter and full-year earnings results on Feb. 14. Revenue for the quarter grew more than 6% to $10.1 billion and was $180 million above analysts’ expectations. Adjusted earnings per share of 45 cents matched the prior year’s result and was in line with estimates.
For 2022, revenue improved 11% to $43 billion, while adjusted earnings per share of $2.48 compared favorably to $2.32 in the prior year.
Organic growth was very strong at 15% for the quarter versus estimates of 11.1%. For the year, organic growth was 16%.
The improvement in fourth-quarter organic growth was due almost entirely to pricing, which added 12%, and product mix, which contributed 2%, as volume was lower by 1%. An extra day during the reporting period did add 1% to results.
Coca-Cola also provided an outlook for the year. The company expects organic growth of 7% to 8% for 2023, ahead of analysts’ estimates for a gain of 3.6%. Adjusted earnings per share are projected to grow 4% to 5% from 2022 levels.
Takeaways
The organic growth rate for Coca-Cola for both the quarter and year were very notable, especially considering these followed high figures in the previous periods. For example, organic growth was 9% and 16% for the fourth-quarter and full year 2021, respectively. The company’s performance in the most recent reporting period is not off an easy comparable period.
In fact, topping tough comparison has been the case for some time as Coca-Cola has produced outstanding organic growth nearly every quarter since the worst of the Covid-19 pandemic. Including guidance for the current year, the company's three-year stack rate for organic growth would be almost 40%. Not bad for what many investors might consider to be a boring consumer staples company.
It was not just a portion of the business that carried results for the quarter as gains were seen in every region, with Latin America higher by 32%, Bottling Investments showing growth of 16%, Asia Pacific up 15%, North America increasing 12% and Europe, the Middle East and Africa improving 9%.
Just as important, the gains on the top line flowed directly to the bottom line. Operating income increased 24% for the quarter and 6% for 2022. The comparable operating margin expanded 60 basis points to 22.7%. While costs are up for Coca-Cola, much like they are for many peers, the company is extracting more profits from its sales.
This reflects favorably upon the company’s brand portfolio, which continues to resonate with consumers. Management noted the company gained value share in the total nonalcoholic beverages ready-to-drink market, with strength seen in both at-home and away-from-home channels.
Price action, taken to offset higher inflationary costs, did drive the vast majority of gains for the company. The positive news for investors is that this did not cause a drastic decline in volume as unit cases barely declined in the fourth quarter. Volume was actually up 5% for 2022, demonstrating that consumers are willing to spend on the company’s products. Coca-Cola faced a tough comparison here as well as unit cases sold were higher by 8% in 2021, but the company still was able to post higher figures.
Unit cases sold did decline 5% in the EMEA and 1% in the Asia Pacific regions in the fourth quarter, but all other areas of the company were up for the period. All regions and businesses showed unit case growth for the full year.
Finally, Coca-Cola raised its quarterly dividend 4.5% to 46 cents on Feb. 16, extending its dividend growth streak to 61 years.
Valuation analysis
Coca-Cola is currently trading at approximately 23 times expected earnings per share for the year. This is very close to the long-term average according to Value Line.
The GF Value Line shows the stock is near its fair value based on its historical ratios, past financial performance and analysts' future earnings projections.
Presently, Coca-Cola has GF Value of $65.36, which gives the stock a price-to-GF Value ratio of 0.92. Reaching the GF Value could mean a return of 9%. Factor in the current yield of 3.1% and total returns could reach into the low double-digit range.
Final thoughts
Overall, Coca-Cola’s most recent report showed strong results in nearly every area of the company and organic growth easily topped what analysts had anticipated. Guidance for 2023 shows that Coca-Cola should be able to continue its streak of high rates of organic growth as well.
Due to this, I believe investors looking for a high-performing consumer staple name with a long history of dividend growth should consider adding Coca-Cola to their watchlist.
