Coca-Cola Has a Lot to Prove on Oct. 23. Here’s Why Investors Should Take Note.

Coca-Cola (KO) is set to deliver third-quarter 2024 earnings the morning of Oct. 23. In addition to providing an update for investors, the report will shed light on the strength of the consumer and global inflationary pressures.

Here’s why Coke has a lot to prove this earnings season and whether the dividend stock is a buy now.

Optimistic guidance

Last quarter, Coke raised several of its full-year targets. It boosted its comparable earnings-per-share (EPS) growth guidance to 5% to 6%, meaning $2.84 in EPS at the midpoint. It also expects 9% to 10% revenue growth and $9.2 billion in free cash flow — which is more than enough to cover the company’s roughly $8 billion dividend expense.

Investors will watch to see if Coke is still on track to meet those goals. But Coke’s sales volumes are an even more important figure to monitor. Coke has been relying on price increases and cost reductions to drive profitability. For the first half of 2024, unit case volumes grew just 2%. Ideally, investors will want to see Coke’s earnings growth be less reliant on price increases.

Coke’s peer, PepsiCo (PEP -0.37%), leaned too heavily on price increases. And now, PepsiCo is implementing promotions and putting more product in certain packages to drive demand. Coke has done a good job growing earnings even without volume growth. However, for Coke to kick into a new gear and justify a higher valuation, the company needs to achieve a more balanced earnings profile.

Coke generates the majority of its sales from outside the U.S. So naturally, currency conversions are going to impact the business. In the second quarter of 2024, Coke grew its operating income by 10%, but comparable currency-neutral operating income grew by a whopping 18%. That means Coke’s business is doing a lot better than the generally accepted accounting principles (GAAP) figures indicate, but it is getting hammered by unfavorable currency conditions.

Investors will want Coke to return to meaningful volume growth and have fewer currency headwinds. If that happens, Coke could lap 2024 with a solid 2025 and justify the run-up in the stock price.

Coke’s big year

Coke has been on a tear in 2024, up 17.8%. Even if the stock price stays the same for the remainder of 2024, it will still be the best year in a decade.

Data source: YCharts.

Coke has been a decent, but not great, stock to own over the past decade. There are a number of reasons it has turned the corner in 2024, but the simplest may be that it is executing well compared to its peers and that its challenges seem solvable.

Despite the inflationary pressures, Coke did achieve organic revenue growth across all operating segments in its second quarter, which is impressive, all things considered. Still, given the big move in Coke’s stock price so far this year, you may think the company is firing on all cylinders, but it simply isn’t at this time. However, if Coke delivers on expectations, the stock could quickly look like a bargain.

Coke has a 28.1 price-to-earnings (P/E) ratio — which looks high at first glance. But Coke has long been an expensive stock. Still, its P/E is above historical levels. However, as you can see in the following chart, Coke’s forward P/E ratio is just 24.4. Meaning if it does deliver on analyst consensus earnings expectations, the stock won’t look nearly as expensive as it does today.

KO PE Ratio data by YCharts

In February, Coke raised its dividend by 5.4% to $0.485 per share per quarter — marking the 62nd consecutive annual dividend raise. Even after the stock’s impressive performance this year, Coke still yields 2.8%.

The beauty of buying a Dividend King like Coke is that it pays investors to wait, which is an incentive to buy and hold the stock even when it looks expensive relative to historical levels.

Coke has a diversified lineup of beverage brands and a highly sophisticated global distribution and marketing network. Its business model is highly recession-resilient and can do well no matter what the economy is doing. Coke’s combination of dividend raises and stock buybacks are key reasons why it has been a holding of Warren-Buffett led Berkshire Hathaway for decades.

Coke is still a top-tier dividend stock for risk-averse investors

Coke’s performance could cool if it fails to meet expectations on Oct. 23, especially if sales volume disappoints and analysts begin to lower their earnings targets — which would make the valuation look even more expensive. Still, even around an all-time high, Coke remains an excellent dividend stock for risk-averse investors to buy.

Coke is an excellent example of the value of high-quality, slow and steady earnings growth. It isn’t the kind of company that will blow expectations out of the water with paradigm-shifting technology or unprecedented innovation. Instead, the true value of the business is growing earnings at a mid- to high-single-digit rate, supporting a higher dividend, keeping a solid balance sheet, and developing or acquiring top beverage brands.

All told, Coke remains a reliable dividend stock to buy now, but it isn’t a screaming buy.