As the year quickly comes to a close, it's a good idea for investors to reflect back on 2023 and see where they can improve as they go forward. Investing is a long-term game, and it's all about trying to get better.
Perhaps you made some money in the "Magnificent Seven" stocks, and you're now looking for some safety and stability. A business such as Coca-Cola (KO 0.60%), the furthest thing from a massive tech corporation, might be on your radar. Is this top beverage stock a smart buy before the end of 2023?
Here's what investors should be thinking about now.
This is a quality enterprise
Everyone has heard about Coca-Cola, whether it's because of the namesake soft drink or its other popular beverages like Vitamin Water and Dasani. This business has one of the strongest brands in the world. And because it has been around for such a long time, Coca-Cola has tremendous stability and staying power.
Investors should realize that this is a quality enterprise. That brand recognition creates a wide economic moat that protects Coca-Cola from rivals in the industry. This competitive standing isn't going to change, at least not for many decades.
This business has proven that it can perform well even in uncertain economic times. In the third quarter, Coca-Cola was able to increase revenue by 11%, a favorable outcome made possible by the company's proven pricing power. Customers are loyal, and they won't easily switch to a PepsiCo product even if it's slightly cheaper.
There are no concerns about this business ever running into financial woes. That's because Coca-Cola is incredibly profitable. In the third quarter, its operating margin was a superb 27.4%. And the business generated $7.9 billion of free cash flow through the first nine months of 2023.
That cash goes toward repurchasing the stock, which increased the equity ownership of existing shareholders. But the majority of the cash, $4.1 billion total in the last three quarters, was used to pay dividends. The current yield is more than 3.1%.
Even Warren Buffett agrees that this is a wonderful business. The conglomerate he runs, Berkshire Hathaway, owns 9.3% of the outstanding stock worth $23 billion at today's prices. Coca-Cola is the fourth largest position in the portfolio, and it generates roughly $736 million in passive annualized income for Berkshire, so Buffett probably has no intention to sell anytime soon.
Disappointing returns
For all of its favorable characteristics, you would think that Coca-Cola would be crushing the market. But this just isn't the case. To be fair, in the 1980s and 1990s this was a fantastic stock that beat the S&P 500 in each of those two decades.
The business hasn't been too kind to shareholders in more recent times, though. Let's look at the past decade. Since Dec. 2013, Coca-Cola has produced a total return (including dividends) of 107%. The S&P 500, on the other hand, would've more than tripled your money. It's the same story in the last one-, three-, and five-year periods as well.
The takeaway is that investors would simply be better off owning an index fund tracking the broader market than adding this dominant beverage business to their portfolios. That's because there isn't any reason to believe that the stock can beat the market over the long term due to limited growth prospects and how mature it is.
Of course, if the current price-to-earnings ratio of 23.7 dropped significantly to a much lower valuation, then perhaps shares would look more attractive as a deep-value play. But in my opinion, this is a stock that's probably best avoided right now for investors seeking higher returns.
