With Coca-Cola (NYSE:KO) stock close to its 52-week high, investors might be concerned that there’s more downside potential than upside. That’s especially true with an earnings announcement coming up on Tuesday, prior to the opening bell.
On top of that, some KO stock shareholders are nervous because 2019’s earnings reports thus far have been less than stellar for a number of blue-chips. For several key reasons, however, I’m choosing to look at the bright side of this famous company’s prospects. In short, no need exists to panic-sell just because earnings season is here again.
Coca-Cola Stock Price Is Actually Undervalued
Being close to its 52-week high doesn’t necessarily mean that the Coca-Cola stock price is overvalued; in fact, KO stock is lagging its competitors. Compared to the broader beverages market, Coca-Cola shares have underperformed by 8.2% year-to-date. They’ve also lagged behind the soft-drink giant’s blue-chip peer group (including PepsiCo (NASDAQ:PEP) and Keurig Dr. Pepper (NYSE:KDP)) by 6.5%.
Additionally, the KO stock price isn’t too lofty compared to its main competitors: checking in on the company’s forward price-earnings ratios, we see that it stands at around 24. That’s a good value in relation to its peers in the beverages market. It just goes to show that you can’t look at the price chart in isolation.
Some elements just don’t show up in the KO stock price.
Always a Dividend Darling
Through multiple generations, KO stock has provided a safety net for stakeholders in the form of a healthy dividend yield. That’s another factor that isn’t reflected in simple price-action charts. The Coca-Cola dividend-king tradition continues to this day. Recently, the company’s board of directors declaring a quarterly dividend of 40 cents per share.
That might not sound like much, but the current dividend yield for KO stock is 3.1%. It’s a compelling reason to ignore earnings fears and hold on to this multi-generational income producer. Given that this constitutes Coca-Cola’s 57th consecutive annual dividend increase, I feel that any earnings surprise — positive or negative — would be nothing more than a bump in the road for this Warren Buffett favorite.
Estimates Are Low, and That’s a Good Thing
When analysts set the bar low, skittish investors tend to abandon ship. But I see it as a setup for a pleasant surprise. Analysts collectively expect Coca-Cola’s second-quarter earnings to increase by only a penny. That’s a mere 1.64% increase over the same quarter the year prior. Not only that, but earnings for this year are projected to increase by just 0.48% compared to the previous year. That’s not exactly a massive hurdle to clear.
Besides, owners of KO stock have every reason to believe that the company will outperform this time around. Indeed, Coca-Cola has met or beaten earnings estimates every quarter since 2012; over the past four quarters, the average earnings surprise was 2.87%. And, with Coca-Cola’s first-quarter 2019 revenues having increased by 5.2%, the outlook (in my eyes, at least) is looking brighter than ever for good old KO stock.
The Bottom Line on Coca-Cola Stock
Coca-Cola stockholders tend to be more conservative investors: less worried about hype and market noise, and more attuned to solid company fundamentals. KO stock has been a classic dividend king and safety net for many years. Earnings hoopla and hubbub are no reason to abandon it now.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
