How High Could Coca-Cola Stock Go?

Coca-Cola (NYSE:KO) has been a staple of the American stock market for decades. The company has been expanding its dividend for 63 years, and a single share of KO stock purchased at the IPO would be worth well over $500,000 today.

With that said, Coca-Cola is clearly a mature company whose forward growth is unlikely to rival its past. How high can Coca-Cola go, and is the stock still worth investing in?

Is KO Undervalued or Overvalued?

A good starting point for projecting how high Coca-Cola could go is to figure out whether the stock is currently trading above or below its intrinsic value.

At the moment, the stock looks slightly expensive with a forward P/E ratio of 24.1 and a price-to-sales ratio of 6.4. For reference, the average forward P/E of the S&P 500 is 21.3, meaning that KO is about 13% more expensive as a function of its forward earnings than the index as a whole.

By some metrics, Coca-Cola is priced roughly in line with its recent history. Though slightly elevated at the moment, trailing P/E is more or less in the range it has been since 2018, excluding a brief drop during the early days of the unusual 2020-21 era. Coke’s price-to-sales ratio is near a record high, though.

A final factor to consider is KO’s dividend yield, which currently stands at about 2.8%. This is somewhat on the low side compared to the yield history of the past 10 years, but not so much that it likely indicates undervaluation.

All things considered, Coca-Cola trades at a bit of a premium to the S&P 500 but roughly in line with its own historical pricing. This makes some sense, as KO is historically one of the most stable stocks to own. Given the company’s brand presence and market dominance, a modest premium is likely justified in Coca-Cola’s case.

How Much Can Coca-Cola Grow in the Near Future?

Even though Coca-Cola is slightly expensive, the company still has long-term opportunities for additional growth. In the coming 3-5 years, analysts predict that the company’s earnings per share will grow at a compounded rate of about 6.2%.

A key driver of this growth is expected to be continued investment in digital marketing. Coca-Cola now markets more online than through its legacy television channels.

As recently as 2019, digital advertising still made up under 30% of the company’s advertising mix. This shift to more cost-effective and more targeted digital advertising is expected to keep driving growth for several years to come.

Management also has a history of being acquisitive and launching new products. A notable example of innovation at Coca-Cola is its small but growing alcoholic beverage business.

The company owns several popular flavored drink brands, including Topo Chico and Simply Spiked Lemonade. With the market for pre-mixed cocktails expected to grow at a compounded rate of 14% through 2030, Coca Cola is building a solid brand foundation in a potentially very lucrative market.

Emerging markets also present new opportunities for Coca-Cola. The company’s bottling arm in Africa, for instance, is expected to IPO in 2025 at a valuation of $8 billion. As markets like Africa, Southeast Asia, the Middle East and Latin America continue to become wealthier, consumers there will likely have more income to devote to spending on soft drinks and similar products.

How High Could Coca-Cola Stock Go?

The median analyst price forecast for Coca-Cola is currently $70, just 1.2% above the stock’s current trading price. Estimates range from $65 on the low end to $76 on the high end, suggesting that Coca-Cola is likely to stay within a fairly narrow trading range for the next 12 months or so.

Even priced at a premium compared to the S&P 500, Coca-Cola is still likely a stock with room to run as gradual growth persists. Though it’s unlikely to produce exceptional growth, the stock may well continue advancing gradually as earnings keep growing over the next several years.

To get a sense of where Coca-Cola could trade in the medium-term future, let’s assume the company’s EPS grows at the 6.2% expected by analysts over the next five years.

Using the last fiscal year’s EPS of $2.50, we would expect to see Coca-Cola earning about $3.38 per share half a decade from now. Assuming the trailing 12-month P/E ratio remains at its current level of about 27.6, this would put KO shares somewhere in the vicinity of $93.

It’s important to note, though, that the stock has the potential to underperform if slower revenue growth, higher input costs or a macroeconomic downturn caused earnings to grow less rapidly than expected.

For the upcoming year, it seems reasonable to expect that KO shares will likely reach between $70 and $75. Management upgrades its full-year guidance in the Q2 to 9-10% revenue growth. Assuming it can hit this target, KO shares will likely trend a bit higher than their present level.

As to whether Coca-Cola is still a good investment, it largely depends on a given investor’s goals. The stock is unlikely to deliver the kind of rapid, volatile growth that popular tech stocks do.

Where KO does shine, however, is in its ability to produce stable, consistent growth over long periods of time while also consistently raising its dividend. As such, the stock is likely to still be a decent buy for dividend investors and those looking for moderate growth opportunities with limited volatility.

Speaking of dividends, no discussion of KO would be complete without looking at its potential for further dividend growth. At the moment, the stock’s dividend payout ratio is 77.6%, leaving limited room for explosive payout growth.

With earnings expected to rise, though, management will likely get a bit more leeway to push the quarterly distribution higher. Analysts foresee a dividend growth rate of about 3.2% over the next three years. Though far from massive, this will keep KO’s dividend streak alive and continue delivering higher yields on cost to the company’s shareholders.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.