Is KO Stock Overvalued?

Coca Cola is so deeply ingrained into world culture that it’s hard to remember there is a business behind it – a business that has the same highs and lows as any other, and one that is struggling more than most through the COVID economy.

Yes, you can buy a Coke anywhere in the world except North Korea and Cuba, but with large venues closed in many nations, Coca Cola’s revenues are down.

However, that decline isn’t evident from share prices. Coke stock is still trading at roughly the same price as it was twelve months ago. That leads to a critical question for investors: is KO stock overvalued? 

Why KO Stock Went Up

From a risk perspective, no stock is 100 percent “safe”, but Coca Cola is as close as a stock gets to risk-free.

Share prices dropped dramatically in March 2020 when the rest of the market did, but they have since recovered to near-pre-pandemic levels. The total decline for the year hovered around 4 percent. 

While that might sound concerning at first glance, consider this: Coca Cola stock is barely down, though revenues tanked and the company as a whole has not yet recovered from the economic damage caused by the pandemic.

Coca Cola makes a large percentage of sales at entertainment venues, sports stadiums, bars, restaurants, and similar, and all of these have been closed for nine months. Though they remain closed and Coca Cola has not regained that revenue, share prices barely show any signs of stress. 

With vaccines rolling out and an end to COVID-19 in sight, industry experts are predicting a return to normalcy by the end of 2021 – at the latest. When large venues reopen, Coca Cola is due for a major boost. Savvy investors are buying now in anticipation of that rise. 

KO Financials Show Year Over Year Declines

Coca Cola’s revenues have gone down in 2020 – 28 percent year-over-year for the second quarter and 9 percent for the third quarter – but no one is especially worried.

Coca Cola is parent to hundreds of brands, and this year’s challenges have given the company time to pause and reflect.

Management has determined that less variety will serve the organization better, and it is in the process of closing or divesting some of its peripheral brands.

To that end, the company has announced a 12 percent reduction in workforce that had some investors briefly concerned. However, when the decision was evaluated more carefully, it became clear that this move is likely to increase the company’s overall profitability. 

Is KO Valuation Too High?

The original Coca Cola was invented by a pharmacist and introduced to consumers in 1886. The company held its IPO more than 100 years ago, in September 1919, and it has delivered reliable shareholder returns – minus a few bad years – ever since.

The first shares went for $40 each, and there have been 11 splits since the IPO. A single share purchased in 1919 would be 9,216 shares today – and worth nearly half a million dollars. 

When dividends are included in overall shareholder returns, the total value is even higher. Coca Cola has paid dividends since just after its IPO, and 2020 marks the 58th year in which the company increased payments.

Today, Coca Cola’s dividend yield is approximately 3.03 percent, which compares positively to the S&P 500 average of about 1.62 percent. 

All of that is to say that KO valuation isn’t too high. While the company might have a bad year now and then, it is strong enough to withstand a few down quarters.

Investors and analysts agree that Coca Cola will be back on top once the pandemic has been extinguished, and it is unlikely to suffer any lasting financial damage as a result. KO stock remains a smart choice to provide stable returns in any portfolio.

Will KO Stock Drop?

Minor ups and downs are normal for any stock, no matter how high revenues and profits are. A bit of bad news about a company or an industry can easily cause a temporary dip in share prices, and Coca Cola is not immune.

However, outside of another market crash, there is no indication that a significant, sustained drop in KO stock is coming. In fact, all signs point to steady growth in coming years, as stock prices reflect the company’s recovery from its COVID-related sales slump.

Is KO Stock Overvalued? The Bottom Line

Warren Buffett bought Coca Cola stock decades ago, and he says he will never sell. The sort of reliable returns KO offers is hard to find, even in other blue chips and Dividend Aristocrats.

Coca Cola is one of the world’s most recognized and trusted brands, which gives the company an edge that new, rapidly growing businesses simply can’t match. 

No, KO stock isn’t overvalued. Given the peace of mind that comes with keeping KO stock in your portfolio, many investors would consider buying if share prices were even higher than they are today. 

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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.