Cola (NASDAQ:TSO) is a stock that is beating the market right now. With this year’s performance and a small price increase, we are well above the performance of the S&P 500. We are finally in a bear market that has also captured the broader markets around the world.
However, Coca-Cola excels on many fronts. Quality, pricing and a relatively simple business model are the powerhouse behind the stock. However, there is a downside to the company’s skyrocketing share prices: a valuation that boasts a dividend yield of now 2.8% and a price-to-earnings multiple in the high 20s.
However, the US beverage company’s stock may still be a market beater. Under one premise. Maybe two or three more will follow.
Coca-Cola: How the stock beats the market
Ultimately, the mix we need for a market-beating investment is relatively simple. Coca-Cola needs a market environment that continues to be affected by inflation. If that happens, there should be reason to exercise pricing power. This should in turn be reflected in moderate growth and a more favorable valuation.
The point is: how likely is further inflation? Of course, we don’t have a definitive answer to this question. But the initial forecasts outline a market environment where inflation rates in the mid to possibly even higher single-digit percentages may continue to occur in the coming years. If, for example, it were two more years, the assessment could still be put into perspective. With the performance of the previous quality and growth rates in the mid or even higher single digit percentage range in earnings per share, the valuation can be normalized again. For its quality and Dividend King status, a price-to-earnings ratio of 20 seems reasonable.
At Coca-Cola, there is of course still some uncertainty about how inflation will develop. But if the dividend per stock growing at 4.8% or in the mid-single digit percentage range as it did recently, it would also be an opportunity for the stock to outperform the market. In the end, I see a slight overestimation if inflation does not hold true. But with two or three years and an existing price increase, it can be done. It ultimately changes the current valuation and outlook.
Is it all a matter of inflation?
Coca-Cola is certainly not dependent only on inflation. But when it comes to beating the market, at least such an environment is conducive. After all, management is exerting its own pricing power right now, giving investors a balanced return.
Even without persistent inflation, a solid return would be possible. However, if the market environment remains the same, I am confident that beating the market will not be a problem.
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Vincent owns shares in Coca-Cola. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola.