- As a dividend king, KO stock is widely held by passive-income seekers
- Recent Q2 earnings were robust and Coca-Cola Classic remains the best-selling caffeinated soft drink globally
- We expect the recent increase in KO stock price to continue and the shares to reach $60
- iShares Evolved U.S. Consumer Staples ETF (NYSE:IECS): the fund is up 16.2% YTD, and KO stock’s weighting is 11.7% in the ETF;
- Consumer Staples Select Sector SPDR® Fund (NYSE:XLP): the fund is up 13.4% YTD, and KO stock’s weighting is 10.1% in the ETF;
- Vanguard Consumer Staples Index Fund ETF Shares (NYSE:VDC): the fund is up 15.3% YTD, and KO stock’s weighting is 8.8% in the ETF.
Since the beginning of the year, investors have put their seal of approval on Coca-Cola (NYSE:KO) stock. In late January, KO was trading around $48. Currently, the shares are shy of $57 and not too far off the recent 52-week high of $57.56.
The current share price of the beverage giant also supports a dividend yield of almost 3%. With just about six decades of consecutive payout increases, Coke is part of an elite group of stocks dubbed dividend kings. As such they always get the attention of passive-income seekers.
On a side note, several other dividend king shares fixed income investors favor include Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), Sysco (NYSE:SYY), Altria (NYSE:MO) and Hormel Foods (NYSE:HRL).
Despite the recent run-up, KO has underperformed the S&P 500 over the past year. Coca-Cola shares returned 17% in the last 12 months, whereas the S&P 500, which saw a record high on Aug. 12, is up by 33%.
Many investors now wonder what they can expect from KO stock during the rest of the year. We believe the bullish momentum will continue and the shares will aim for $60.13, the all-time high hit in February 2020, before the pandemic.
Therefore, today we discuss how investors might consider incorporating the shares into their portfolios.
How Recent Earnings Came In
Coca-Cola Classic is the best-selling caffeinated soft drink worldwide.
Recent metrics suggest:
“Coca-Cola retains [the] title of world’s most valuable and strongest soft drink brand, brand value US$33.2 billion and elite AAA+ brand strength rating.”
Yet, in recent years, Coca-Cola has struggled with decreasing soda sales. But management has started diversifying its offerings with teas, coffees, juices, water, and sports drinks.
In late July, Coca-Cola announced robust Q2 metrics. Revenue was $10.1 billion, an increase of 42% year-over-year. Operating income was also up 52%.
Non-GAAP EPS went up by 61% YoY and reached 68 cents. Investors were also pleased to see that cash flow from operations was $5.5 billion so far in the year. A year ago, it had been $2.7 billion. The company announced significant sales in core geographies, including North America, China, and Brazil.
On the results, CEO James Quincey said:
“Despite the asynchronous nature of the recovery, we are raising our full-year guidance. We are executing against our growth plans and our system is aligned.”
For full-year 2021, management now expects to generate 12%-14% in organic revenue growth. The previous guidance had been 9%.
Nonetheless, the company still anticipates pandemic-related issues and potential risks over the rest of the year. For example, the recent increase in COVID-19 cases due to the Delta variant has been pressuring sales in India as well as in several other countries.
What To Expect From KO Stock Price
Among 26 analysts polled via Investing.com, KO stock is projected to outperform. The 12-month median price target of $61.92 would represent a return of more than 8% from the current level.
Chart: Investing.com
According to the technical charts, short-term oscillators are currently approaching overbought levels.
Chart: Investing.com
However, they can stay like that for quite a long time. More than likely, KO stock will trade sideways in the coming weeks—especially between $55 and $57—until it builds a base around those levels.
When we look at longer term charts and trend lines, we expect the bullish move to continue, possibly to the $60 level, the record high hit about a year and half ago.
As part of the short-term sentiment analysis, it would be important to look at the implied volatility levels for Coca-Cola options, which typically show traders the market's opinion of potential moves in a security. However, it does not forecast the direction of the move.
KO’s current implied volatility is 12.6, which is lower than the 20-day moving average of 14.1. In other words, implied volatility is trending lower. Although the current IV level could change, for now it would be safe to assume that the market does not expect wild swings in Coca-Cola shares.
3 Possible Trades
With that information, here are three possible trades for investors who expect the positive momentum in KO stock to continue in the coming weeks.
1. Buy KO Stock At Current Levels
Investors who are not concerned with daily moves in price could consider investing in KO stock now.
On Aug. 11, KO stock closed at $56.73.
Buy-and-hold investors should expect to keep this long position for several months while the stock potentially makes an attempt at the record high of $60.13.
With a long-term focus, most retail investors can patiently get through the short-term noise of the markets while they hold robust shares that can weather potential adverse developments.
Assuming an investor enters this trade at the current price and exits around $60, the return would be slightly more than 5%. Meanwhile, they would be entitled to the dividend payouts.
Investors might also consider placing a stop-loss at about 3-5% below their entry point.
2. Sell A Cash-Secured Put Option On KO Stock
Our second trade involves a cash-secured put strategy. We have recently covered this option in numerous articles. Here is one example.
KO stock traders could now sell a Nov. 19, 55-strike put option, which is currently being offered at $1.35.
Assuming traders would enter this put-selling strategy at the current price, the upside is keeping this premium of $135 as long as KO stock closes above $55, when the option expires. A total of $135 would be the maximum return for this trade.
The downside is if Coca-Cola stock trades below $55.00 ahead of expiration. Should that occur, traders could be assigned 100 shares for each sold put at a cost of $55.00 per share.
At expiry, this trade would break even at a stock price of $53.65 (i.e., $55-$1.35).
3. Buy An ETF That Has Coca-Cola As A Top Holding
Many readers of this column would be familiar with the fact that we regularly cover exchange-traded funds (ETFs) that could be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to KO stock, but would still like to have sizeable exposure to the shares could consider buying a fund that holds the company as a leading name.
Examples of such ETFs include:
Bottom Line
Coca-Cola is an important holding for many dividend investors. The company has withstood numerous market challenges as well as recessions over the past six decades while raising KO stock’s dividends every year. As we expect the shares to see a new record high in the coming months, we believe the company deserves further research.