With Growth Stocks Faltering, Coca-Cola Makes Sense As A Defensive Play
Investing.com | Nov 15, 2018 02:02
When the US’s top growth and technology stocks are wobbling and markets are undergoing a downturn, there's still a cohort of stocks quietly moving higher. These companies—which many see as boring and are rarely mentioned when talk turns to 'sexy' stocks—are the ones that offer safety. They reward stakeholders even when investors run for cover as they abandon higher profile, formerly-market-favored, high growth stocks.
Of course, it’s difficult to predict the future direction of the stock market; but the latest trends suggest that the correction that started in early October could be deepening. While the current earnings season has shown that the health of the North American corporate world remains strong, the cost of doing business is rising fast.
Investors are also concerned about the possibility for slowing US economic expansion and an escalating trade battle between the US and China, the world’s two largest economies. Since October 9, the S&P 500 has lost 4.45%, pressured by the top technology companies which mostly fueled the gains of the past decade.
In this aging bull run, it makes sense for long-term investors to cut their risks, book some profit, and diversify some of their funds to quality dividend stocks. We believe Atlanta-based Coca-Cola (NYSE:KO) is one of the safest bets during times of distress.
h3 Iconic Brand, Global Reach/h3Coke’s iconic name and global reach make this company a solid defensive stock. The world’s largest soft drink maker has a wide economic moat. Even better, it's an immensely powerful brand, one that's expected to hold up even more effectively under turbulent economic conditions, enabling the company to generate stable earnings and pay growing dividends.
Because of this, Warren Buffett, the world’s most successful value investor, has, since 1988, been holding a significant position in the company. Buffett’s $1-billion initial investment in Coke has increased about 16 times over the past 27 years, via both share price and dividends, giving him an annualized return of around 11%.
Though Buffett bet on Coke more than two decades ago, we think the time is still right to take a long-term position in Coke. With its recent entry into the hot beverage market, after this year's $5-billion deal to buy UK-based Costa Coffee, the company has momentum. The stock closed yesterday at $49.76, up 11% over the past month, at a time when the S&P has slipped, currently down about 2%.
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The Costa deal opens another door for the company’s long-term growth via the most robust segment of the non-alcoholic beverage marketplace. With 3,800 stores, Costa affords Coke a global retail presence and a hedge against slowing soda sales.
In its Q3 2018 earnings report, released at the end of October, Coke posted strong organic sales growth, showing the company is on track to become a “ total beverage company” as it attracts consumers who are health-conscious and looking for alternative drinks.
In North America, the company saw double-digit sales expansion for Coca-Cola Zero Sugar and Powerade Zero, as well as strong growth in premium water brands such as Topo Chico and Glaceau smartwater.
According to comments by Chief Executive James Quincey during the recent earnings call, the company is also shifting toward premium water brands in emerging markets including Mexico and China. As well, Coke maintained its forecast for underlying earnings per share growth of 8% to 10% based on increased sales and cost cuts.
Bottom Line
With its aggressive growth initiatives and accelerating market share in new business areas, Coke's stock looks attractive for conservative investors. That’s the reason shares have outperformed the benchmark S&P 500 during the recent downturn.
In our view, Coke remains a solid dividend stock for long-term investors. The company has increased its dividend 56 years in a row. With an annual yield of 3.14%, Coke is a safe bet if you’re considering shifting funds to stable, dividend stocks.
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