Dividend Stocks

Can Coca-Cola Get Its Mojo Back?

There is probably no company more important to the history of the American South than The Coca-Cola Company (NYSE:KO). But I don’t buy or invest in history. That’s not a reason to be in on KO stock.

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Today, in 2021, Pepsico (NASDAQ:PEP) is by far the better investment. In fact, Pepsi stock has outperformed Coke over the last five years. That’s because Pepsi is now a food company, not just a drinks outfit.

Coca-Cola does have a place in portfolios, however. It offers steady dividends that rise with time. Its dividend has more than quadrupled over the last 20 years. The stock price has more than doubled. All in all, KO is the very model of a conservative investment.

KO Stock: Can Coca-Cola Be More?

The task of trying to make Coca-Cola more than that fell to James Quincey in 2017. He follows a line of non-American KO CEOs, stretching back almost 20 years to the troubled reign of Doug Ivester.

Quincey has worked around the edges of Coca-Cola, with smaller can sizes, brand extensions and moves beyond sugar. Even carbonation is now said to have negative health effects. As such, Quincey has turned to healthier drinks, with plans to buy a controlling interest in the sports-drink maker Bodyarmor, for example.

Now, the CEO says he wants to make “big bets,” like a reboot of Coke Energy and Coke Zero Sugar. Quincey said recently the company has 11 of these “thoughtful and intelligent experiments” lined up for 2021, which could comprise 20% of its global pipeline.

The pandemic hit KO hard, with sales down 11% and net income down over 13% in 2020. But Coke maintained its dividend and even increased it by a penny this month. KO stock now yields 3.28%, compared with a 30-year bond yielding nearly 2.4%.

Rising Optimism

Quincey’s careful innovation and the slow fade of the pandemic has gotten some attention from analysts.

RBC Capital Markets, which downgraded the stock in January, upgraded it to “outperform” in March with a new price target of $60.

However, a big danger that remains for Coke is taxes. A U.S. tax court ruling covering the years 2007 through 2009 could mean a bill of $3.3 billion. But that pain could be lessened by provisions in the 2017 tax cut, which could also reduce Coke’s tax burden going forward.

Coca-Cola remains one of the “strongest” American brands in the world market, ranked even above Disney (NYSE:DIS) according to Brand Finance. The London-based brand evaluation company estimates the value of the Coca-Cola brand at $33.2 billion, almost twice that of Pepsi.

But it’s that comparison to Pepsi that’s also hurting KO stock the most. The problem with that analysis is that — as I noted above — the two companies are now very different. Pepsi is now a food company, its numbers driven by Quaker Oats and Frito-Lay. Conversely, Coke has avoided investments outside its niche for over 30 years, since selling Columbia Pictures to Sony (NYSE:SNE) for $3.4 billion in 1989.

The Bottom Line

All in all, Coca-Cola and Pepsico are different companies that should appeal to different investors.

Coke is instinctively conservative, in the best possible sense. It places intense focus on what it does best. That is, making water potable and selling it at the highest possible price, in the greatest variety of forms.

That’s what the company has been about for almost a century since a dispute between bottlers and syrup makers caused it to focus on the question of water quality. Pure water is the key to making every Coca-Cola taste the same. It’s also the key to making sure it’s “healthy.”

Quincey still faces challenges on the health front. But he has also shown he will protect and even raise Coke’s dividend. That’s why you buy KO stock. Ignore the price and go for the yield.

On the date of publication, Dana Blankenhorn directly owned shares in PEP.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.