Coca-Cola(NYSE: KO) is a powerful consumer brand with a competitive edge that is difficult to overstate. The business has a presence in over 200 countries and territories. And 2.2 billion servings of its drinks are consumed every single day. Very few companies have found such adoption.
In the past five years, this leading beverage stock has produced a total return of 51% (as of Dec. 30). Where will Coca-Cola be five years from now?
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Coca-Cola has been around for a very long time, and over the decades, its operations haven’t really changed much. Over a five-year time horizon, investors can expect things to stay the same.
That’s not necessarily a bad thing. The company dominates its industry, and it should continue leading the market for the foreseeable future. That’s a positive attribute, as it means the business won’t be affected by technological disruption or new entrants competing on its turf.
The revenue gains won’t be impressive, though. Consensus analyst estimates call for sales to rise at a compound annual rate of just 3.9% between 2024 and 2027. I believe this pace will probably keep up even after this forecast period. The company’s products are already ubiquitous, so there is less of an opportunity to expand.
Its earnings power shouldn’t go unnoticed. The brand strength affords the business a certain level of pricing power, and this flows to the bottom line. In the past five years, the company posted an average quarterly operating margin of 26.3%. It’s hard to argue with this kind of earnings performance.
Those huge profits help support its dividend, which currently yields 2.91%. In 2026, the board of directors should hike the quarterly payout. If this happens, which I view as a virtual certainty, it will mark the 64th straight year that they approved a dividend increase.
There is one way that Coca-Cola might change, since it’s a natural extension of its operations: its strategy of expanding its product portfolio. This is a smart move by management because it allows the business to serve the tastes of more consumers across the globe. And it adds diversification to the revenue base.
Coca-Cola has implemented this strategy historically via acquisitions. Most recently, it purchased Costa in 2018 for $5.1 billion. Before that, the company bought Topo Chico in 2017. There are now more than 200 different drinks under the Coca-Cola umbrella, and it wouldn’t be surprising if another acquisition happens before the end of the decade.
Investors are familiar with the saying that past performance is not indicative of future results. This is something to always keep in mind when thinking about stocks and how they might do in the future. We can’t simply extrapolate historical data, since companies are always evolving.
But with Coca-Cola, I believe it’s reasonable to assume that past trends will continue. In the trailing-five-year period, the stock has dramatically underperformed the S&P 500, putting up a total return that’s about half of the broader index’s gain. There’s no reason to believe it will be able to outperform the benchmark between now and the end of 2030. I expect it to lag the S&P 500.
That’s because this is a mature company. Consequently, it won’t suddenly report incredible revenue and profit growth. If this did happen, which I view as extremely unlikely, then there would be a high probability that the stock would do very well.
This muted outlook doesn’t mean it’s off-limits as a potential investment; it just depends on your goals. If you want outsize growth potential, then this stock should be avoided. However, if it’s safety, stability, and predictability that you’re after, Coca-Cola could be a worthwhile portfolio addition.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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