Is Coca-Cola Going Back to Being a Market-Beating Stock?

If I didn't know any better, I think I'd be surprised to learn that Coca-Cola (NYSE: KO) has been losing to the market for years. Although there's been a sprinkling of market-beating turns over the years, altogether, Coca-Cola has been trailing the market for -- drumroll please -- more than 30 years.

That's not necessarily alarming. Everyone knows you buy this Dividend King for its dividend, right? That's one way to invest. Large, established companies don't always beat the market, but they provide other benefits, like passive income and reliability. No one expects Coke to go out of business.

But Coca-Cola stock may be returning to its market-beating status of yore. It has surpassed the S&P 500 (SNPINDEX:^GSPC) return over the past three years, and it's neck and neck in 2024. Can investors start to think about Coca-Cola stock as a market beater again?

Why did Coca-Cola stock fall behind?

Coca-Cola is the world's largest beverage company, with $46.5 billion in trailing-12-month sales. It owns several $1 billion brands, including names you know, like Sprite, Dasani, and Minute Maid.

At their core, Coke-branded drinks carry much of the company's weight and are reliable for high volume and steady growth. But before the pandemic, it looked like it was losing its touch. Revenue fell for years until CEO James Quincey took over in 2018. Things looked like they would improve but fell apart when the pandemic started.

However, the company made some important strategic decisions at that time, and four years later, it's in a better place than it's been in years.

For example, it slashed its brand count from 400 to 200. If you can't imagine how it ever had 400 brands, that's because most of the ones it cut out were small, local names that accounted for a tiny percentage of volume and sales. Management cut them loose to refocus its resources on its core, global brands.

It's still acquiring new brands, but it's buying brands like Bodyarmor, a global $1 billion brand. Feeding new brands into Coca-Cola's global distribution systems gets them into customers' hands at higher cost efficiency -- the brand wouldn't be able to do what Coca-Cola can at the same costs. Whenever Coca-Cola brings a new brand into the fold, it increases its own revenue and creates higher profits and margins. That's a recipe for long-term growth at highly profitable levels.

Now that Coca-Cola is back in growth mode, demonstrating its strength as a beverage superpower, the market is sensing its worth. You can see why this should continue. There are more populations to conquer and more brands to buy. It's a model that the company should be able to maintain for many years.

More than protection

Investors might buy market-underperformers for several reasons. A stock like Coca-Cola pays an excellent dividend that yields more than double the S&P 500 average and is as reliable as they come. It also has plenty of cash and a dominant position in its industry, which provides security. These are important features for a well-diversified portfolio.

Not every stock in your portfolio needs to be a growth stock. In fact, for the average investor, they shouldn't all be growth stocks. You need secure anchor stocks that stabilize your portfolio and provide protection during downturns and bear markets. The sprinkling of times that Coca-Cola stock has outperformed the market over the past 30-odd years has largely been in bear markets when investors flock toward secure investments.

But now that Coca-Cola is back in growth mode, it may offer more than protection for your growth stocks. There are no guarantees about how Coca-Cola will perform and whether its stock can keep up its market outperformance. But it should have renewed tailwinds in a revitalized economy as interest rates settle down, and there's definitely a possibility that Coca-Cola stock will keep beating the market. Even if it doesn't, there's always the dividend.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.