The artificial intelligence (AI) industry continues its remarkable expansion, with global market volume expected to grow at a CAGR of 28.5% through the end of the decade to reach $826.7 billion. This meteoric rise is being fueled by companies going all-in on AI, with nearly three-quarters of CEOs saying that generative AI is a top priority.
That includes the usual Big Tech suspects, but the AI revolution is also expanding to encompass names like beverage giant Coca-Cola (KO). The company recently made headlines by making a significant new step to double down on its AI initiatives, partnering with another blue-chip powerhouse in the process. This continues Coke's leadership in a broader industry trend where traditional consumer staples brands are tapping into tech to maintain their competitive edge and help “future-proof” their businesses against shifting consumer preferences and tastes.
Against this backdrop, Coca-Cola's well-known legacy as a Dividend King comes into a new light. The company's 60+ years of dividend growth and healthy 3% yield are now coupled with a more fully tech-forward approach, offering investors a unique combination of reliable passive income and exposure to the burgeoning AI space.
Is KO the ideal dividend growth stock right now? Here's a closer look at Coca-Cola's recent AI initiatives and their implications for the company's growth trajectory and stock performance.
About Coke Stock
We all know KO as the global beverage behemoth behind some of our favorite drinks, but it's worth pointing out that Coca-Cola's business model revolves around selling beverage concentrates and syrups to bottlers, who then produce, package, and distribute the finished products to retailers and consumers worldwide. This asset-light model has enabled the company to maintain a strong financial position and generate consistent cash flows.
Over the past 52 weeks, Coca-Cola stock has lagged the broader market with a 3.3% drop, compared to gains of 21% for the S&P 500 Index ($SPX). On a YTD basis, though, KO is keeping pace with the benchmark index; both are up over 5%.
In terms of valuation, KO is currently trading at a forward P/E of around 21.9x, which is a slight discount to the stock's historical average of 24.5x, and in line with its major rival PepsiCo (PEP). Similarly, KO is priced at 5.83x forward sales - not cheap on an absolute basis, but still cheaper than its 5-year average of 6.15x.
Turning to Coca-Cola's dividend prowess, the company has an impressive track record of 61 consecutive years of dividend increases, solidifying its status as a "Dividend King." The current quarterly dividend of $0.485 per share translates to an annual dividend yield of 3.14% based on the current share price.
With free cash flow climbing to $160 million at the end of the most recent quarter, and earnings on the rise, these dividends are well-covered.
KO Beats & Raises
In its newly released Q1 earnings report, Coke reported adjusted net income of $0.72 per share, up from $0.68 in the year-ago period. Revenue rose 3.1% year-over-year to $11.3 billion. The results beat analysts' expectations, with Wall Street targeting adjusted EPS of $0.69 on $10.95 billion in revenue.
For the full fiscal year 2024, management raised its organic revenue growth forecast to 8%-9%, driven by an increasing shift toward premium beverages.
Wall Street analysts expect earnings to rise 4.5% this fiscal year to $2.81 per share, followed by 7% growth to $3.01 per share in the following year.
Coca-Cola Partners With Microsoft on AI
Ahead of its earnings report, Coca-Cola announced a partnership with Microsoft (MSFT) to leverage generative AI. By committing $1.1 billion to Microsoft's Cloud and AI capabilities, Coca-Cola aims to unlock significant value across various business functions, from marketing and manufacturing to supply chain operations.
This strategic move allows Coca-Cola to experiment with groundbreaking technologies like Azure OpenAI Service, enabling the development of innovative use cases powered by generative AI. One key area of focus is exploring AI-powered digital assistants to streamline operations and boost efficiencies, suggesting KO may be looking for potential cost-cutting opportunities alongside growth and innovation. Additionally, the partnership will test the integration of Copilot for Microsoft 365.
Beyond its billion-dollar AI deal, Coca-Cola's diversification efforts, such as its foray into the rapidly growing ready-to-drink (RTD) alcohol beverages category, further solidify its strong fundamentals. The company has adopted a strategic "test-and-learn" approach, leveraging its iconic brands like Topo Chico while expanding its existing portfolio of premium adult cocktail mixers and tonics.
What Do Analysts Expect for KO?
Analysts are upbeat on KO, which has a “strong buy” consensus. Out of 17 analysts, 12 recommend a “strong buy,” one suggests a “moderate buy,” and four advise holding the stock.
The mean target price stands at $65.57, indicating a potential upside of approximately 6.4% from Wednesday's close. The Street-high target of $70 is a 13% premium.
Coca-Cola: A Compelling Blend of Passive Income and AI-Driven Growth
Coca-Cola stands out as a compelling pick for investors seeking a blend of steady income and growth potential. With its strategic innovations and strong dividend history, the company is well-positioned to continue thriving. Wall Street's bullish outlook further reinforces Coca-Cola's appeal, making it a top choice for those looking to enhance their portfolio with a resilient and forward-looking stock.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
