Despite being a long-standing dividend stock, is Coca-Cola (NYSE: KO) too expensive to invest in? In this clip from “The Rank” on Motley Fool Live, recorded on April 25, Motley Fool contributors John Bromels, Jason Hall, and Zane Fracek discuss whether the beverage giant is a buy.
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John Bromels: What we don't remember is that in '88-'89, Coke was far from a slam dunk stock. It was actually seen as really risky. The market was just coming out of the 1987 Big Black Friday, or was it Black Monday? I get my black days confused.
Jason Hall: Monday.
Bromels: It was Black Monday, the big 1987 Black Monday crash. Coke and Pepsi (NASDAQ: PEP) and other beverage brands had a really tough time. In the '80s, this was the Cola Wars. This was the, who's going to come out on top? Pepsi had that “Choice of a New Generation” slogan that then everybody thought it was going to eat Coke's lunch. So this was actually a pretty savvy move by Buffett to purchase Coca-Cola at, I think he bought it at around 18 times earnings at the time. It currently sits at about 30 times earnings. And it has, in fact, beaten the S&P 500 on a total return basis, handily, since 1988, '89, up more than 3,000%, whereas the S&P is up only about 2,000%. I can see why he bought it. I can see why he's held onto it.
Zane Fracek: John, I'm curious also what you think about their expansion into other things. Like, for people that don't like regular Coke, I feel like they've done a great job of getting into bottled water, sports drinks, and that kind of thing. I don't know, are you fans of the moves they made there?
Bromels: There is definitely evidence that carbonated beverages sales are on the decline on a worldwide basis so I think, yes, Coke definitely had to do something to get into other types of beverage classes. So yeah, I absolutely think that was the right move to expand particularly into the bottled water market, energy drink market. The reason I still ranked Coke fairly low although I think I ranked it higher than y'all did.
Hall: Yeah, you put it in the middle of the pack, and we all ranked it near the bottom.
Bromels: Yeah, it was less because I think Coke is about to have some sort of renaissance and suddenly do like gangbusters but more out of skepticism about some of the other stocks that I ranked lower. I mean, this is a fairly, at this point, predictable dividend payer. It's going to keep churning out dividends. It's going to keep selling beverages, but at this point it's so large and so ubiquitous, I don't know that there's a whole lot of upside down there, but I don't know how y'all feel.
Hall: I feel like this is wonderful. This is delicious stuff.
Bromels: I will fight you, Jason Hall.
Matt Frankel: My fancy beverage here that my wife got me turned onto.
Hall: I don't even know what that is. And that's actually, that's the reason why I'm not really interested in this one or the one that John's holding up there. This is a wonderful business. It is a wonderful business. It is going to be a wonderful business for a very long time. But, it costs. It trades for 29 times earnings. The S&P 500 trades for 25 time earnings, so you're paying a premium to the market for a business that's really going to struggle to grow volumes, right? We've seen with their cost advantage and pricing power, they can do great things with profits. But it trades for 25 times free cash flow and 29 times earnings. So that's, I mean, that's the story for me why I ranked it so low. It's a wonderful business. When they get this big and this predictable, you can't overpay that much.
Jason Hall has no position in any of the stocks mentioned. John Bromels has positions in Coca-Cola. Matthew Frankel, CFP® has no position in any of the stocks mentioned. Zane Fracek 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.