Coca-Cola: Q4 Earnings Solid, But Stock Remains A Hold

Summary:

• The Coca-Cola Company reported Q4 earnings and met on EPS, beat on revenue, and raised outlook.
• Coca-Cola stock’s YTD underperformance has brought valuation down, but it is still a hold here.
• Upcoming dividend increase should increase the stock’s floor price.

The Coca-Cola Company (NYSE:KO) has just reported its Q4 results, as Seeking Alpha has covered here. Compared to the Q3 quarter, which was a beat all around along with a raise in outlook, Q4 seems to be a mixed bag on initial review with EPS being inline, revenue beating by 1%, and global unit case volume declining by 1%.

I have a history of reviewing Coca-Cola’s earnings, as can be seen here and here. Referencing past articles and using the same approach to cover the latest numbers not only holds the authors accountable but also leads to consistent Quarter-on-Quarter or Year-on-Year comparisons. Let’s take a look at some of the highlights from the recent earnings (some numbers are for the full year)

• Q4 EPS of 45 cents came in line with expectations. That means, for FY 2022, Coca-Cola reported a comparable, non-GAAP EPS of $2.48. As of this writing, the stock is trading at $61 pre-market and that means Coca-Cola is trading at a trailing earnings multiple of 24.50.
• Q4 Revenue of $10.13 Billion beat by $180 Million. That helped Coca-Cola achieve a 11% full year revenue increase to $43 Billion.
• Organic sales came in at 15%, well above the consensus of 11%.
• Global unit case volume declined 1% in Q4 but was up 5% for the full year. This is an often overlooked but important metric for Coca-Cola. It includes beverages sold directly and indirectly by Coca-Cola and its partners.
• Full year Free Cash Flow (“FCF”) was $9.50 Billion, a big decline from the $11.2 Billion the previous full year. Is that concerning? I will evaluate this in detail after Coca-Cola announces its expected dividend increase this week but for starters, dividend coverage looks just about okay based on even the declined Free Cash Flow as the company needs $7.612 Billion in FCF to cover dividends. The FCF based payout ratio is breaching into the 80% mark as a result. That worries me a little bit but as I mentioned, let’s evaluate that after the upcoming dividend increase.
• Coca-Cola has managed to gain market share in Nonalcoholic-Ready-To-Drink (“NARTD”) in both U.S and international markets. With not many avenues to increase sales organically, NARTD is an important market for Coca-Cola, as it is expected to grow at about 6%/yr till to reach about $1.5 Trillion in 2030.

Outlook and Conclusion

All the above is in the rearview mirror. What is the outlook for Coca-Cola shares here on?

• Coca-Cola expects organic revenue growth of 7% to 8% in 2023, despite inflationary and currency based headwinds.
• As a result, the company expects EPS growth to be a little muted at 4% to 5% in 2023. Using 2022’s reported EPS of $2.48, the guided range for 2023 is between $2.57 and $2.60. At the pre-market price of $61, Coca-Cola is trading at a forward multiple of 23.45 using the higher end of the EPS range. That’s quite rich for a company expected to grow at 5%/yr (just like its guidance).
• Coca-Cola has underperformed the S&P 500 Index (SP500) by about 10% YTD, and I expect this to continue should The Fed continue its recent dovish stance as inflation cools down. But as I’ve written in the past, stocks like Coca-Cola are my homeowners and car insurance. I don’t really pay attention to them until I need them. But when I need them, boy am I glad I had them! 2022 proved this emphatically, as Coca-Cola outperformed the market by more than 20% at various points.
• But for most investors, Coca-Cola is not about share price appreciation but rather its reliable and ever increasing dividends. I fully expect Coca-Cola to announce its 61st dividend increase on Thursday, February 16th and I look forward to reviewing it.
• With the EPS guidance between $2.57 and $2.60 for 2023, investors can expect the new quarterly dividend to be at least 46 cents per share. That would be a dividend growth rate of about 5%, which is not too shabby for a company that has been increasing payout for more than 6 decades at this point.
• In summary, Coca-Cola had a reasonably strong Q4 as expected, but it was not an “all-out beat” like Q3 was. I believe at 23 times forward earnings, the stock is fully valued here, and with the market getting into “risk on” mode in the early days of 2023, I expect Coca-Cola to trade sideways unless inflation and as a result, The Fed, catch the market by surprise, sending more investors to seek safety.
• If you’ve followed Coca-Cola for a long time, you will know the stock rarely trades at a yield level above 3.50%. If the “risk on” mode continues and Coca-Cola offers a more generous dividend increase than predicted, you may be able to buy Coca-Cola at a yield well north of 3%. I am holding onto my The Coca-Cola Company shares and reinvesting the dividends while waiting for a pullback to add more.

Disclosure: I/we have a beneficial long position in the shares of KO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.