Earnings season provides a glimpse into how a company performed over the past quarter. This can be especially important if there is a macro-economic factor that has impacted business results.

One company that has seen the direct impact from the COVID-19 pandemic is The Coca-Cola Company (KO). Coca-Cola, which is a top holding of many institutional investors such as Athanor Capital, was negatively impacted by the ongoing pandemic in its most recent quarter. But Coca-Cola remains a high-quality dividend stock. It is a Dividend King with over 50 years of annual dividend increases.

Is this a long-term issue that should cause investors to sell their positions or are there better days ahead for the company?

Background and Earnings Results

With a market capitalization of $207 billion and annual sales of $33 billion, Coca-Cola is the world’s largest beverage company. Coca-Cola holds more than 500 unique non-alcoholic brands that account for 2 billion servings of beverages worldwide every day.

Coca-Cola released earnings results for the second quarter on 7/21/2020. Adjusted earnings-per-share declined $0.21, or 33%, year-over-year to $0.42. Revenue of $7.2 billion was 28% lower than the previous year. Much of these declines were due to a loss of market share in away-from-home channels.

Organic revenue fell 26%, primarily due to a 22% decrease in concentrate sales. North America concentrate sales were down 18% while EMEA decreased 26%. Asia volumes were down 21%. Much of this was due to the closing of businesses due to the continued spread of COVID-19. As the lockdowns of restaurants increased in the U.S. unit case volumes dropped significantly.

That said, Coca-Cola has seen unit volumes begin to improve in July as stay at home directives were eased in areas of the U.S. and rest of the world. This points to a return to demand as countries around the world recover from the COVID-19 pandemic.

The drop in unit volumes also wasn’t a much a headwind to operating margins during the quarter, as this metric was down just 30 basis points to 30%. This is a decent result given the top and bottom-line numbers.

Putting results in context, we believe that Coca-Cola will see an increase in unit volumes as restaurants and convenience stores reopen. Another shutdown, however, would prolong the downturn in Coca-Cola’s results.

Potential Returns

While recent results were poor, they weren’t unexpected given the circumstances. Long-term investors should keep this in mind while making an assessment of future growth potential.

Sure Dividend expects Coca-Cola to increase earnings-per-share at an annual rate of 7.5% over the next five years. The company, prior to the most recent quarter, had seen solid growth in terms of volumes and has been able to improve its pricing power.

The company has also increased its dividend for 58 consecutive years, one of the longest growth streaks in the market. Shares currently offer a yield of 3.4%, which 150 basis points above the average yield of the S&P 500.

Shares trade at approximately $48 currently. We expect that the company will generate $1.80 of earnings-per-share in 2020, giving the stock a forward price-to-earnings ratio of 26.7. While expensive, this is lower than the average price-to-earnings ratio of the S&P 500 of 27.8.

The current valuation is in excess of our 2025 target multiple of 21 times earnings. Reverting to this average multiple by 2025 would reduce annual returns by 4.6% over this period of time. All totaled, we believe that Coca-Cola offers a total annual return of 6% over the next five years.

Final Thoughts

Coca-Cola endured a highly challenging quarter, primarily due to factors outside of its control. The COVID-19 pandemic has upended business for a large percentage of companies.

While volumes were down as lockdown orders intensified in the second quarter, Coca-Cola’s operating margin held up fairly well. Absent the pandemic, Coca-Cola likely would have seen its volumes as well as overall results improve.

We do not expect high shareholder returns for Coca-Cola in the coming years. However, Coca-Cola remains a blue-chip dividend stock with an above-average yield and a long history of dividend growth, making the stock more appealing for investors focused on dividends.