The stock market has had a volatile year in 2022. Hints of a fall started late in 2021 when the Federal Reserve talked about rate increases to slow down rising inflation. The sell-off accelerated when it began raising rates this year while inflation pressures worsened, highlighting that the Federal Reserve may need to hasten the pace of increases.
But while growth stocks have gotten hammered, Coca-Cola (KO -0.14%) is approaching record highs. Several factors buoy the iconic beverage brand, including excellent profits, a substantial dividend payment, and pricing power. Let's look at each in more detail below.
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Solid and increasing profit margins
Coca-Cola's business is run on solid and healthy profit margins. Over the previous decade, its gross profit margin was relatively stable at around 60%. Even in the pandemic-plagued year in 2020, its gross profit margin was 59.3%.
Similarly and perhaps more impressively, Coca-Cola delivers excellent operating profit margins. From 2012 to 2021, this margin has increased from 22.4% to 28.6%. This characteristic of excellent profit margins has worked in its favor in 2022 as the market suddenly shunned unprofitable growth stocks and placed a premium on profitability.
KO Gross Profit Margin data by YCharts
Coca-Cola is increasing its dividends
In the previous decade, Coca-Cola has increased its dividend per share from $1.02 to $1.68. Its dividend payout ratio, which measures the percentage of earnings paid out in dividends, was 71.29% most recently.
KO Payout Ratio data by YCharts
With interest rates rising throughout the world, investors place a premium on the timing of cash flows. The sooner they get a return from their investments, the better. That makes sense. Investors can take dividend payments and reinvest them in other stocks. Alternatively, they could take their dividend payments and buy government bonds, which are now yielding close to 3%.
The higher that interest rates get, the more the premium on the timing of cash flows becomes. With the Fed transparently forecasting it will continue raising interest rates, Coca-Cola could further benefit from this factor.
Pricing power is crucial with rising inflation
Finally, Coca-Cola has demonstrated pricing power over decades. The company has a long history of delivering refreshing goodness to consumers. If its input costs rise because of inflation, a scenario that is happening currently, Coca-Cola can pass along those increases to consumers to protect its profit margins.
Economic theory and practical observation suggest that when a business increases prices, the number of units sold decreases. The companies with the best pricing power observe the lowest magnitude of reduction with those price increases. In its most recent quarter, which ended on April 1, Coca-Cola's revenue increased by 16%. Management attributed 7% of that increase to changes in prices and package sizes. It was yet another demonstration of its pricing power.
A proven, profitable business model, faster return of cash flows, and pricing power are all highly desirable characteristics of potential investments during the current economic backdrop -- Coca-Cola has this in spades. It's no surprise, then, that its stock is nearing record highs while the rest of the market teeters in correction territory.
