Coca-Cola Co. (KO) is a defensive stock—one that’s unlikely to beat the market during periods of euphoria, but will reliably preserve capital and deliver steady, compounding returns to shareholders. The long-term thesis rests on the company’s unmatched brand power and its stable yield, which together create attractive dividend compounding over time.
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That’s why, in today’s environment—a market dominated by optimism and high-beta tech names—low-beta defensives like Coca-Cola may be “out of fashion,” yet they remain strategically valuable as anchors within balanced portfolios.
With valuations sitting below their historical peaks and consumer spending tilting toward higher-income segments—precisely the demographic Coca-Cola captures through its diversified brand portfolio—the setup looks constructive for KO. Supported by Q3 earnings that impressed the market and reaffirmed annual guidance, I believe Coca-Cola stock deserves a Buy rating in the current climate.
A Quality Compounder Out of Sync With the Market Cycle
To begin with, Coca-Cola has been a weak performer over the past few years, lagging the broader market. Despite its solid moat as a defensive stock and its unmatched brand and pricing power in the beverage space, that appeal is somewhat underappreciated—or simply less useful—in a high-growth, AI-driven bull market.
Even though fundamentals remain strong, the narrative, combined with valuation dynamics and opportunity costs, has shifted against it. Over the past five years, Coca-Cola’s top line has grown at a 7.3% CAGR, and EPS has grown at a 9.3% CAGR—growth that exceeded cumulative inflation over the period.
Back in the pre-pandemic era, when interest rates were near zero, KO’s “bond-like” profile was highly desired by investors. The stock traded as high as 33x earnings versus roughly 23x today. As yields climbed above 4% in the following years, the same steady 6–8% EPS growth started to look less compelling relative to risk-free Treasury returns, even with an average dividend yield of around 2.9% over the last five years.
In my view, that’s been the main reason behind KO’s modest de-rating and multiple compression. Simply put, it makes less sense to own a slow grower in a 4–5% yield environment—investors naturally wait for cheaper entry points when risk-free returns are that high.
Tight Margins but Cash Flows Stabilizing
There are also secondary factors that have limited the appeal of KO shares. For instance, the business currently operates with gross and EBIT margins of 61.5% and 31.9%, respectively—both close to ten-year highs (which peaked in 2018). The trajectory of margins now looks increasingly tight, and in a market that rewards operating leverage, KO seems capped on the upside.
Zooming in on Coca-Cola’s recent trajectory and assessing its financial strength through the lenses of free cash flow and balance sheet, a few key points stand out.
Over the last twelve months, Coca-Cola generated $5.57 billion in free cash flow—a solid improvement versus the $4.7 billion reported in 2024, although still reflecting a 26% annualized deterioration over the past five years. Last year, dividends paid totaled $8.36 billion, exceeding FCF by 78%. In the nine months so far this year, the $2.2 billion in free cash flow generated also remains well below the $4.4 billion in dividends distributed.
While this is something to monitor closely, I don’t see any significant near-term risk. Coca-Cola holds an A+ balance-sheet rating, giving it cheap access to credit and ample liquidity. According to management’s guidance, the company projects a 2025 free cash flow of around $9.5 billion (excluding the fairlife contingent consideration payment), which, in theory, would bring the payout ratio back to roughly 90%—in line with its historical range.
I believe this trend also helped KO regain momentum after its Q3 results. The reaffirmed cash flow guidance signaled an improvement in these dynamics, leading to a positive market reaction following the stock’s weakness since late August.
When Coca-Cola’s Moat Speaks Louder Than Diversification
Speaking of earnings, Coca-Cola also reaffirmed its full-year top- and bottom-line guidance in Q3 and posted solid 6% YoY organic revenue growth, outpacing the industry average. Volume grew by only 1% year-over-year and was flat in North America. This gap between revenue mix and volume growth indicates that higher-income consumers are still spending freely, driving demand for premium products.
In fact, Coca-Cola’s organic revenue growth has been much stronger than that of its peers—particularly PepsiCo (PEP), which grew only 1.3% YoY over the same period. This difference largely reflects PepsiCo’s greater exposure to volume pressures and its lower premium mix, at a time when Coca-Cola’s brand moat tends to stand out.
For that reason, even though PepsiCo currently offers a slightly more attractive dividend, the macro backdrop looks less favorable, and its premium GAAP multiple may be somewhat stretched. While PepsiCo’s thesis offers more diversification, I see limited relative upside for PEP at this point.
Is KO a Buy, Hold, or Sell?
Market experts remain largely bullish on KO’s investment case. Of the 15 analysts covering the stock, 14 currently rate it as a Buy, with only one assigning a Hold rating. Following the Q3 results, several bullish analysts also raised their price targets for KO, reflecting renewed optimism about its outlook. The average price target now stands at $79.85, implying an upside potential of almost 14% from the latest closing price.
A Timeless Compounder, Not a Short-Term Winner
I still don’t see the market shifting toward a preference for “boring stocks” like Coca-Cola anytime soon. Even though recent results have given KO an edge over peers such as PepsiCo—mainly due to its stronger resilience to volume headwinds, a more premium product mix, and better margins—I don’t believe the stock can deliver significantly higher upside in the short to medium term, even if it continues to outperform its peers.
That said, for those willing to hold the stock over a multi-year horizon—which, in my view, is the right way to approach Coca-Cola’s investment case—I believe KO remains an excellent choice. In periods of market euphoria, Coca-Cola serves as a reliable low-beta name at current multiples and yield levels, especially considering that investors rarely lose money owning KO, even if it doesn’t necessarily beat the broader market. For that reason, I rate Coca-Cola stock as a Buy for the time being.