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Don’t Sweat Coke Earnings — KO Stock Remains a Buy

Coca-Cola (KO) reported second-quarter earnings this week indicating that the company struggled in North America amid a focus on healthier diets and a cold, wet spell that sapped demand for thirst-quenching soft drinks.

Profit dropped 4% overall thanks to these issues and, of course, the continued drag of a slowdown in Europe. And amid tough competition from Western players like PepsiCo (PEP) and Dr Pepper Snapple (DPS) to make inroads into emerging markets for growth, it’s hard to move the KO needle.

But if you’re a long-term investor, you can’t go wrong with consumer staples giant Coca-Cola. KO stock still is a buy for the dividends, stability and fair(er) valuation after the rollback.

There are admittedly risks. Coca-Cola earnings showed that North American drink volumes fell 4% — the fourth such drop in the past five quarters. Revenue is forecast to be flat in fiscal 2013 and up 5% at best in fiscal 2014, so this trend doesn’t seem to be changing anytime soon in the eyes of Wall Street. Furthermore, with a forward price-to-earnings ratio of 17 or so right now, it seems the incremental growth in profits due to efficiencies over the next year is priced into shares.

But let’s be realistic. Nobody buys Coke stock for growth — it’s the stability and dividends that give this consumer staples play its fizz.

Coca-Cola has paid dividends since 1893 and increases those payments like clockwork. KO stock currently yields about 2.8%, but its quarterly dividend of 28 cents is up more than 150% from a split-adjusted 11 cents in 2003 and up 550% from 4.25 cents in 1993.

That steady increase in dividends means your investment in Coca-Cola now will only pay back more over time — even if KO shares don’t burn down the house.

Remember that one of KO’s biggest shareholders is Warren Buffett’s iconic Berkshire Hathaway (BRK.B), which owns 400 million shares or about 9% of Coca-Cola. When one of Wall Street’s best minds sees Coke as a centerpiece of his company’s portfolio, it’s worth noting.

And by the way, despite short-term headwinds, Coke stock neared all-time highs this spring and is up about 40% from the market’s October 2007 peak — so it’s not like this argument about dividends and stability means there is not long-term share appreciation to be had either.

Coca-Cola earnings were indeed disappointing and the revenue headwinds are real. However, don’t discount the long-term power of this pick.

A pullback might be a good time to buy and hold for many years to come.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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