This Dividend King Is Trading at Record Highs. Is It Too Late to Buy the Stock?

Established industry giants don't usually make the cut for exciting, hyped-up stocks. But investors have been loving Coca-Cola (NYSE: KO) this year. The beverage giant is up 21% year to date, beating the S&P 500 and hitting new record highs along the way.

Is it too late to buy the stock?

The model

Although Coca-Cola is a longtime industry leader, it's been going through changes that have affected it in powerful ways. CEO James Quincey came on board in 2018 when sales were slowing down, and it looked like the company might be losing ground. He also had to face a global pandemic, and he restructured the company to leverage its unmatched distribution network as efficiently as possible. Coca-Cola slashed its brand count in half (to about 200) and launched beverages in new sizes and bottle types. It's been successfully raising prices to offset the effects of inflation, and it has increased its revenue and profits despite years of economic upheaval.

Revenue increased 3% year over year in the second quarter,with organic revenue up 15%. Operating margin expanded from 20.1% a year ago to 21.3%, while adjusted operating margin expanded from 21.6% to 32.8%.

Due to its size, reach, and distribution channels, Coca-Cola has a model that lends itself to growth and efficiency. Although it got rid of half of its brands, they were mostly small, local names that accounted for a tiny portion of sales and volume. However, it's still acquiring global brands that can add scale, and since 2006, eight of its billion-dollar brands have come from acquisitions.

Once a new brand gets into Coca-Cola's distribution system, the company can use its vast data trove to identify where it should go and leverage its robust channels to get products into the right places faster and cheaper than the brand could have done on its own. That creates higher sales for Coca-Cola at more profitable levels.

Revenue has finally reached record levels again after declining for several years prior to Quincey's tenure. It makes sense that investors are excited about this business again.

The opportunity

In case investors are worried about future growth, management says it is "awestruck" by the opportunity ahead of it. Although Coca-Cola's already the largest beverage company in the world, it's not the only player, and it sees significant potential in gaining market share. Even if Coca-Cola just keeps its market share without expanding it, the industry has been growing around 5% to 6% annually over the past few years.

But it's planning on grabbing more market share through a deliberate innovation strategy. It has a three-pronged approach focused on coffee brands, emerging brands, and energy brands. That's on top of its core beverage brands of Coca-Cola and regular ready-to-drink categories like juice and dairy.

Management sees "limitless combinations" to drive higher sales as it reaches global markets and creates new products at different price points.

The dividend

Coca-Cola pays a healthy dividend that typically yields around 3%. At its current price, the stock yields 2.7%. It's also a Dividend King that has raised its dividend annually for the past 62 years, and that dividend is rock solid. Management has paid and raised it under all kinds of circumstances over the decades. Even during the pandemic, management said it was completely committed to the dividend, even though its payout ratio sailed past 100%.

Warren Buffett has lauded Coca-Cola as a stock he'd never sell, and a great dividend is one of his markers of an excellent stock to own.

The stock

Although Coca-Cola stock is trading near record levels, it price-to-earnings (P/E) ratio remains close to its five-year average. The rising share price doesn't mean Coca-Cola's valuation has become overly expensive.

Data by YCharts.

Coca-Cola may not offer the same opportunities as a young growth stock, but it has plenty of opportunities to expand its reach while being a reliable source of passive income. If that fits your investing profile, it's not too late to buy Coca-Cola stock.

Should you invest $1,000 in Coca-Cola right now?

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Jennifer Saibil 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.