A good stock market correction isn’t all bad. While never fun to live through, corrections give us the opportunity to snap up shares of our favorite companies at better prices.
Right now, one of my favorite companies is Coca-Cola (KO). The question is — is this the right opportunity at the right time?
Sure, prices can always go lower. But if you believe you got a good price, and one that will lock in solid returns for potentially years to come, that shouldn’t be the sort of thing that keeps you up at night.
Think about it. If you buy a good pair shoes for 50% off the normal price, you’re going to feel pretty good about yourself. If the price gets knocked down to 75% off the next day, you might be a little annoyed. But you’re going to look down at your feet and still feel pretty good about your purchase.
Of course, not all stocks are a good bargain, even after a substantial decline. Some stocks might take years to recover their losses … if they recover them at all.
A case in point would be Coca-Cola. Following Warren Buffett’s high-profile purchase of a large chunk of Coca-Cola stock in the late 1980s, shares went parabolic. By 1998, KO stock traded for 11 times sales and 55 times earnings.
It was the ultimate buy-and-hold-forever-like-Buffett stock … right up until the bottom fell out. The Coca-Cola stock price collapsed from a split-adjusted $43.41 in 1998 to less than $20 by 2004.
It wasn’t until fall of last year, fully 16 years later, that the Coca-Cola stock price broke through its old 1998 highs. And since then, the stock has slumped by about 14%.
Is Coca-Cola Stock Worth a Shot Now?
Starting with the macro backdrop, it doesn’t look great. American soft drink sales have been in decline for 10 years running, and in a survey last year, 63% of Americans reported actively avoiding them. Sodas have effectively become the new cigarettes, coming under attack as a public health issue for their contribution to obesity and diabetes. So, KO’s core product is under pretty intense attack at the moment — a problem also plaguing competitors like PepsiCo (PEP) and Dr Pepper Snapple (DPS).
Of course, Coca-Cola sells more than than just Coke. The company is a major player in fruit juices and sports drinks via its ownership of Minute Maid and Powerade, respectively, as well as other brands. It’s also a major player in bottled water via its ownership of Dasani and Glaceau Vitaminwater.
Coca-Cola’s diversified empire has enabled it to keep the revenue decline modest. Though I should emphasize that revenues have been falling for three years. Some of this is due to the effects of a strong dollar, but certainly not all of it.
Of course, at some price, modest sales declines are more than priced in. Let’s take a look at valuations to see if that might be the case with Coca-Cola stock.
Coca-Cola stock traded hands at 11 times sales in 1998. As recently as 2007, it sported a P/S ratio of nearly 5.3. Today, that ratio is a much more reasonable 3.7. By this metric, KO is priced at about 2009 levels.
The cyclically adjusted price earnings ratio, or CAPE, makes KO look even cheaper. As Coca-Cola has managed to grow its earnings per share faster than revenues due to cost cutting and share repurchases, the CAPE has been mostly trending down since 2010. Today, Coca-Cola’s CAPE is around 2008 levels.
Let’s not forget the dividend. At today’s prices, KO yields a nice 3.4%. And Coca-Cola has hiked that dividend for 53 consecutive years and counting. Over the past 10 years, Coca-Cola has improved its payout at a roughly 9% annual rate. Clearly, KO is a company that has managed to take care of its shareholders in good times and bad.
So, on balance, is Coca-Cola stock a buy?
I’m not pulling the trigger just yet. If you’re planning on buying and holding for the next 30 years, reinvesting your dividends along the way, then I would say that today is as good a day as any to start buying shares.
But if you’re looking for a stock to deliver market-beating returns, this probably isn’t it. Coca-Cola is too big of a company to turn on a dime, and there is no improvement in sight for its core products. And with the dividend payout ratio now at 74%, we probably can’t expect the dividend hikes to be quite as generous as in years past.
For now, Coca-Cola stock — like its namesake product — is probably best put on ice.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.