So far this year, the market rally has been impressive coming out of 2022’s sell-off. Moderating inflation data has been a key market driver over the past several months. The inflation rate fell to 6.5% in December but remains far above the 2% target range.
Economists expect headline inflation to fall from 6.5% to 6.2% in the next Consumer Price Index (CPI) reading. As inflation falls closer to the Fed’s target and as earnings revisions show signs of bottoming, markets will likely march toward an economic recovery.
Given the optimistic outlook on inflation and the labor market, analysts do not expect markets to give up all the recent gains. However, comments from Fed officials regarding interest rates staying higher for longer than expected suggests that a short recession is likely in 2023. Further, a negative surprise from the next inflation reading might be met with outsized volatility.
Meanwhile, such periods of volatility come around as an opportunity to add quality investments at better prices to one’s portfolio. To that end, investors could lean on fundamentally sound dividend-paying stocks, The Coca-Cola Company (KO) and Cisco Systems, Inc. (CSCO), for some stable returns in February.
The Coca-Cola Company (KO)
KO is a famous beverage company that manufactures, markets, and sells various non-alcoholic beverages globally. It sells its products under the brands: Coca-Cola, Sprite, Fanta, Diet Coke, Coca-Cola Zero Sugar, Thumbs Up, Aquarius, fairlife, Minute Maid Pulpy, and Simply, among others.
The company paid a quarterly dividend of 44 cents per share to its shareholders on December 15, 2022. KO’s four-year average dividend yield is 3.06%, and its forward annual dividend of $1.76 translates to a 2.95% yield at the current price level. Its dividend has grown at a 3.2% CAGR over the past three years and a 3.5% CAGR over the past five years. Also, it has a record of 60 consecutive years of dividend growth.
KO’s trailing-12-month levered FCF margin of 22.49% is 790.6% higher than the 2.53% industry average. Likewise, its trailing-12-month ROCE of 44.13% is 324.3% higher than the industry average of 10.40%.
KO’s net operating revenue increased 10.2% year-over-year to $11.06 billion in the third quarter that ended September 30, 2022. Its gross profit grew 7.1% from the year-ago value to $6.50 billion, while its net income attributable to shareowners increased 14.3% year-over-year to $2.83 billion. The company’s EPS increased 14% from its year-ago value to $0.65.
Analysts expect KO’s EPS and revenue to increase 2.7% and 3.6% year-over-year to $2.56 and $44.33 billion, respectively, in the fiscal year 2023 (ending on December 31, 2023). It surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past three months, the stock has lost 2.1% to close the last trading session at $59.62.
KO’s solid prospects are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Sentiment and a B for Stability and Quality. The stock is ranked #15 of 37 stocks in the B-rated Beverages industry.
To see additional POWR Ratings of KO for Growth, Value, and Momentum, click here.
Cisco Systems, Inc. (CSCO)
CSCO designs, manufactures, and sells Internet Protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products.
On February 7, 2023, CSCO introduced powerful new cloud management tools for industrial IoT applications, simplified dashboards to converge IT and OT operations, and flexible network intelligence to see and secure all industrial assets. With these new innovations, the company should be able to provide greater visibility and control over networks.
On January 31, CSCO exhibited its new range of collaboration devices for Microsoft Teams and unveiled the new Cisco Table Microphone Pro, a digital and multi-directional table microphone for hybrid workspaces, along with audio interoperability advancements.
Such innovations are expected to advance hybrid workers’ experience by delivering more inclusivity and choice for meetings while improving the manageability, configuration, and security required by IT.
In the same month, the company paid a quarterly dividend of $0.38 per common share. Its annual dividend of $1.52 yields 3.22% at the current price level. Its dividend payouts have increased at a 2.8% CAGR over the past three years and a 5.6% CAGR over the past five years. CSCO has a record of 11 years of consecutive dividend growth.
The stock’s trailing-12-month net income margin of 22% is 622.2% higher than the 3.05% industry average.
CSCO’s total revenue increased 5.7% year-over-year to $13.63 billion for the fiscal first quarter (ended October 29, 2022). The company’s operating income grew 3% year-over-year to $3.54 billion, while its non-GAAP net income came in at $3.55 billion, representing a 2.1% year-over-year increase. Also, its non-GAAP EPS came in at $0.86, up 4.9% year-over-year.
The consensus EPS estimate of $0.86 for the second quarter that ended on January 31, 2023, represents a 1.9% improvement year-over-year. The consensus revenue estimate of $13.42 billion for the last quarter indicates a 5.5% increase from the prior-year period. The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
It has gained 3.5% over the past three months to close the last trading session at $47.26.
CSCO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Stability. Within the B-rated Technology - Communication/Networking industry, it is ranked #3 out of 49 stocks. Click here to see the other ratings of CSCO for Growth, Value, Momentum, and Sentiment.
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KO shares were trading at $60.19 per share on Monday morning, up $0.57 (+0.96%). Year-to-date, KO has declined -5.38%, versus a 7.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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