(Image credit: Tasos Katopodis/Getty Images for NYCWFF)
Few companies have Coca-Cola’s (KO) track record when it comes to returning cash to shareholders, but as a defensive dividend machine, KO stock hasn’t been able to keep up with the broader market over the past couple of decades.
The Buy-rated Dow Jones stock remains one of Wall Street’s favorite names in the consumer staples sector, but truly long-term shareholders would have been better off putting their cash in an S&P 500 index fund.
That might come as something of a surprise given Coca-Cola’s global reach and impeccable blue-chip credentials. After all, no less an investing eminence than Warren Buffett has maintained a massive position in the fizzy drinks maker for nearly four decades.
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The Oracle of Omaha drank Coca-Cola – and studied its business – for more than 50 years before adding it to the Berkshire Hathaway equity portfolio in the late 1980s. To this day, KO is the holding company’s fourth-largest position. With a stake of 400 million shares worth about $26 billion, KO accounts for almost 10% of Berkshire’s U.S. stock portfolio.
Buffett’s affinity for Coca-Cola is due in no small part to all the cash it returns to shareholders. Indeed, as a member of the S&P 500 Dividend Aristocrats, KO is about as reliable a dividend grower as they come. The company has increased its payout annually for more than six decades.
KO has also been generous in returning cash to shareholders through stock buybacks. Over the past five years, Coca-Cola has spent an average of $154 million per quarter to repurchase its own shares.
But then that’s what a mature company in Coca-Cola’s position needs to do to keep shareholders happy. With average annual revenue growth of only about 3% over the past two decades, KO isn’t exactly a growth stock.
The bottom line on Coca-Cola stock?
It shouldn’t really come as a surprise that a defensive dividend payer like KO trails the broader market over the past couple of decades. After all, as a low-beta stock, KO tends to lag the S&P 500 when the market is rising, but also holds up better when everything is selling off. A long bull market driven by outsized gains in tech and communication services stocks is going to leave defensive names behind.
That’s partly why KO stock lags the S&P 500 on an annualized total return basis over every standardized time frame beyond one year. Heck, over the past three-, five-, 10- and 15-year periods, KO lags the broader market by anywhere from 5 to 12 percentage points.
And as for the past two decades? It’s not good. Have a look at the chart below to see what KO’s chronic underperformance looks like on a brokerage statement.
(Image credit: YCharts)
If you put $1,000 into Coca-Cola stock 20 years ago, it would today be worth about $6,200, good for an annualized total return of 9.6%. The same amount invested in the S&P 500 would theoretically be worth about $7,900 today.
Truly long-term shareholders have benefited from the ballast a consumer staples stock like KO can provide in tougher markets, but as a less risky name, it also provided less reward.
As noted above, the Street is bullish on KO at current levels. Of the 24 analysts covering the stock surveyed by S&P Global Market Intelligence, 13 rate it at Strong Buy, seven say Buy and four call it a Hold. That works out to a consensus recommendation of Buy, with high conviction.
Speaking for the bulls, Jefferies analyst Kaumil Gajrawala calls KO a “standout” among industry peers.
“The business is strong and getting stronger,” says Gajrawala, who rates shares at Buy. “Volumes are healthy. Coke’s mix and pricing dynamic is one of the best in our space and free cash flow is set to accelerate.”