Is Coca Cola Stock a Buy After a Massive Earnings Report? | Coca Cola (KO) Stock Analysis!

Coca-Cola stock is now hitting new all-time highs after releasing their latest quarter's earnings report. And right now they're trading right at $90 a share, up 7% on the day and 32% now in the last year. And to really put that into just a little bit of perspective on a total return basis now Coca-Cola is outperforming the tech heavy S&P 500 despite the fact we've been in a massive bull run. Coca-Cola with a total return of 82.3% and the S&P 500 at 68.4% and my portfolio is certainly reaping the benefits. I've held Coca-Cola for a little while now. I haven't added shares in a while, but I've basically seen a 100% total gain on this position. Now, to be completely fair, we can look at different periods of time, and obviously there's periods of time where the S&P 500 has outperformed, like over the past 10 years and over the last 3 years. But over the past 5 years, and the last year specifically, Coca-Cola has done very, very well. And since I've added it to my portfolio, it's definitely outperformed. So, we have a lot we need to break down in today's video. We need to look at the recent earnings report. Assess what the dividend metrics look like. Look at Coca-Cola versus Pepsi because a lot of people seem to believe that Pepsi is a better value right now and ultimately take a much closer look at the quality of the company and the fundamentals. So, let's go ahead and dive into it. But first, I'd like to say thank you to Dividend Wealth for sponsoring this video where you can currently get a 14-day free trial and 40% off at the link in the description. If you're tracking dividends by hand, then you're still making a huge mistake. Dividend Wealth just released a huge update where you can automatically connect your brokerage with your dividend wealth account. 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Now, if we jump over and look at the recent earnings report, we can see Q2 non-GAAP EPS of 97 was a beat by 4 cents and revenue of 13.4 billion was a beat by 230 million. Now, here's what's perhaps most exciting. Yes, Coca-Cola is a more defensive play. It's a much slower growing mature business, but for a mature But for a more mature business, 7.2% revenue growth year-over-year is actually quite strong. And again, we'll put it into a little bit of comparison like to Pepsi. Pepsi is guiding that they'll only grow revenue at about 2 to 4%. So revenue growth is much stronger than their closest peer. So when you post stronger than expected revenue growth, up 7.2% year-over-year and a beat on earnings, all of a sudden that's a good start to your earnings report. It's part of the reason that the stock is up over 7% on the day. But here's what's even more exciting. If we actually jump over to Coca-Cola's website, let's scroll all the way down and look at the guidance that they issued for the rest of the year. You can see their outlook right here, the 2026 outlook. So, if we scroll down, let's take a closer look. We could look at what's going on with revenues. They bumped up the low end from four to 5% to just 5%. They bumped up their expectations for comparable earnings per share. But here's what's perhaps most important, the guidance they're giving on free cash flow. Now, why is this so important? Well, if we jump over to our dividend breakdown sheet, you'll be able to see why. Obviously, one of the reasons people love Coca-Cola is for what appears to be a very durable dividend that has grown for over 50 consecutive years. But when we look at free cash flow versus dividends paid out, we can see free cash flow for the last 2 years hasn't covered dividends, which if you know me, I think that's a major red flag, at least most of the time. But the reality is the numbers here don't paint the full picture behind what's really been going on behind the scenes. In fact, let's take a much closer look at the free cash flow breakdown. If we jump over to our free cash flow sheet, I've already added Coca-Cola. Remember, free cash flow is simply our operating cash flows minus capital expenditures. So, operating cash flows is the cash flows that the core business is actually generating minus any capital expenditures. the cash a company spends to either buy, build, upgrade, or maintain their long-term assets such as buildings. Now, what we can see is it's not necessarily a capex issue. Operating cash flows have been down substantially over the last couple of years. Why has this been the case? Well, in reality, it's not as much of a red flag as you would think. What we can see is yes, free cash flow hasn't covered dividends, but in 2024, you have to understand Coca-Cola paid around 6 billion into escrow related to its longunning IRS tax dispute. So excluding that IRS deposit, free cash flow was actually about 10.8 billion. So really, adjusted free cash flow in 2024 was somewhere around right here. In fact, it was just a little bit lower than it was in 2021, which was a record year. So, in reality, adjusted free cash flow easily covered those dividends because they had the onetime payment. Now, what about 2025? Well, again, it's a somewhat similar situation. Coca-Cola made a 6.1 billion contingent payment tied to its 2020 acquisition of Fairlife. Excluding the Fairlife payment, normalized free cash flow was about 11.4 billion, which actually was a record-ear free cash flow. So, in both of these years, they had a one-time payment that lowered operating cash flows. But that's not going to be the case in 2026. In fact, when we look at their guidance, they're estimating that free cash flow will come in at 12.4 billion, which by the way is higher than their prior guidance. So cash from operations at 14.6 billion. 14.6 billion. That is substantially higher than we had seen at any previous point in the company's history. 2021 was the previous record year at 12.6, but now they're telling us 4.6 6 billion in cash from operations while capex spending is continuing to remain at around 2.2 billion. So capex spending really isn't increasing that much while operating cash flows are growing at a high rate which of course ultimately leads to record- free cash flow of 12.4 billion. This is why Coca-Cola is in a very strong position from a dividend perspective. Free cash flow is growing, operating cash flows are growing while capex is remaining relatively stagnant. So, the reality is this is a very safe dividend payment and it's why they're able to continue to maintain the yield at about 2.3% and dividend growth of around 4% as well. But here's the other reality we have to take into consideration. If free cash flow was going to grow to 12.4 billion, that's growth that's higher than 4%. So ultimately, if the company wanted to in the coming years, they could grow the dividend at a even faster rate if they chose to do so without seeing a major increase in the free cash flow payout ratio. So that right there is the core of why the stock is up so much today. Ultimately, the core business is doing very well and the company is increasing their guidance. Now, there's a lot of people who are confused by this stock's move because look at how Pepsi's done over the last few years. If we look at Pepsi stock over the last 5 years, it's actually down by 8%. In the last year, it's traded flat and year-to- date has traded flat. So, why has Pepsi done so poorly during this time period? And if you've been watching the channel for a while now, you know, I've been bullish on Coca-Cola. Obviously, I own it, my portfolio, and I have serious concerns about Pepsi stock that I've stated over the last couple of years. Thankfully, I heeded my own advice because the performance of Pepsi has been exceptionally bad, particularly since 2024. The stock is down substantially. So, why have we seen such a divergence between the two stocks? On the surface level, Pepsi looks incredibly cheap. For example, look, historically speaking, they've traded at a relatively similar valuation level, but once we get to around 2024, we see a stark split in the level of valuation. Coca-Cola now trading at a 25.5 PE multiple while Pepsi is trading at just 16x. So Coca-Cola is at a stark premium to Pepsi. However, what we can see is the fundamentals are backing up Coca-Cola's valuation. And that's not necessarily the case for Pepsi. For example, look at the dividend breakdown sheet. What we'll see with Pepsi is yes, the starting yield significantly higher. Dividend growth has actually even been higher in the past. But here's where we have concerns. Free cash flow is really not covering those dividend payments and it hasn't for the last four years. The free cash payout ratio is right at 100%. Except this is due to weakness organically within the business. Let me show you what I mean. If we jump back over to our free cash flow analysis, what you'll see is operating cash flows have really started to stagnate over the last few years. And while capex spinning has actually come down some which obviously helps free cash flow, free cash flow is still not growing because just internal weakness with the business and their guidance is very weak. Like I mentioned earlier, they're essentially guiding to around 2 to 3% revenue growth, which when you take into consideration the fact that's essentially in line with inflation, that means the purchasing power overall with the business is essentially not growing. Now, I have a lot of content going deeper into the issues with Pepsi. I made a video recently if you want to dive into that concept more, but the reality is Coca-Cola is fundamentally a much stronger business right now. Now, that being said, we've dived in some differences with Coca-Cola and Pepsi. We've looked at the recent earnings report. We do still need to ask the question whether or not the current valuation for Coca-Cola's stock is justified. Now, when we look at the PE multiple for Coca-Cola over the last decade, we can see there's been multiple periods of times where they've really traded at as high of a valuation as they're trading at right now. Right now they're trading at about 25.5 times earnings, a 25.5 PE multiple. There's been a lot of periods of times, for example, 2020, 2021, and even periods during 2022 where the valuation has been higher, but the current valuation is still higher than their historic average over the last decade. And that's definitely true if you look at the last 5 years and if you look at the last 3 years as well. So, they're at a bit of a premium compared to how they've historically traded. So, let's take a deeper dive into this and see whether or not this is actually justified. If we jump over to our sensitivity analysis and take a closer look at Coca-Cola, there's a couple of things that we do need to make note of. To start, we can see the projected EPS kagger from 2026 to 2030 is sitting at about 6.5%. Now, if we're trying to project forward returns, that's half the battle, projecting future EPS growth. So assuming they get somewhere close to in line with what analysts are estimating through the year 2030, that'd be about 6.5% EPS growth every year. But here's what we need to do. We need to apply our projected PE multiple. Now, when you normalize the PE multiple, you can see historically speaking on average, they've traded at around 23 to 24 times earnings. So if they revert back to that level, what does that mean in terms of forward returns? Well, if they trade at a 23.5 PE multiple, all of a sudden, forward-looking returns really aren't that attractive at their current price. So, what does this mean? Well, it means a lot of the future returns do rely on the fact. Well, in my opinion, it means a lot of forward-looking returns for Coca-Cola at this point depend on one thing. How much are investors willing to pay for what I would call AI proof and recessionproof cash flows? Because ultimately a stock's PE multiple is more than anything determined by two things. How fast are they growing earnings? And two, how predictable are the future cash flows of the business? We already know Coca-Cola isn't necessarily a high growth stock. I mean, I think they're growing earnings at a healthy rate for this mature of a business, but investors are clearly paying a much higher PE multiple than they would typically pay for a stock growing earnings at about 6.5%. Ultimately, this is because investors view Coca-Cola as a very defensive business. Every single day when you look at financial news, you hear murmurings of a potential AI bubble. And whether or not that's true, we can see the market is trying to position themselves into stocks that have some defensive characteristics like Coca-Cola stock. If we saw a massive decrease in capex spending from big tech, obviously Coca-Cola is not going to be negatively impacted by that. To a lot of investors, that makes them attractive. So the reality is purely from a numbers perspective, we can see Coca-Cola looks to be perhaps even a little bit overvalued at current prices. It certainly is trading at a premium relative to how fast it's growing earnings. So if you're a shareholder of Coca-Cola, I don't think this necessarily means you need to trim your position or sell out of your position, but I'm personally not adding shares at current prices. Coca-Cola has proven to the market that fundamentally speaking, it's even stronger than a lot of the market has realized. And obviously the share price is moving accordingly. The dividend is more than safe. Free cash flow is growing at an even faster rate than the market even originally anticipated. They increased their revenue guidance, their earnings and free cash flow guidance. And the market is looking for places to place capital where the threat of an AI bubble is not just absolutely immense. So again, holding Coca-Cola in my portfolio has done very well. It's been a position that's way outperformed. I'm not adding shares at current prices, but I'm continuing to let the stock run. So, go ahead and let me know what you think of Coca-Cola in the comments down below.