It’s not often that dividend stalwarts are viewed as obviously mispriced, but Bank of America sees an exception in Coca-Cola (KO) stock.
For generations of investors, Coca-Cola has delivered uninterrupted dividend income, paying every year since 1920, according to Investing.com.
That record stretches back long before most modern blue-chip investors were born. More importantly, Coca-Cola belongs to an elite group of companies that have raised their dividends for 63 consecutive years, earning it the moniker “Dividend King,” according to Seeking Alpha.
Now, in a note shared with me, Bank of America analysts argue that investors can scoop up this dividend machine at a compelling discount ahead of a key Q2 earnings release on July 28.
BofA isn’t treating Coca-Cola as a tired defensive stock; in fact, it sees limited inflation exposure and ample financial flexibility to navigate macro headwinds with aplomb.
Why BofA sees a rare opening in this dividend machine
Bank of America just gave Coca-Cola stock a big thumbs up before its Q2 earnings report.
It reiterated its buy rating and, more importantly, raised its price target to $95 from $90, implying nearly 15% upside.
BofA’s bullishness on KO stock has everything to do with the quality and durability of its resilient underlying business.
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What makes it a standout among peers is its resilient demand, limited inflation exposure, and robust balance-sheet flexibility.
Case in point: Its trailing 12-month gross margin has held steady at around 61.7%, or approximately 160 basis points above its five-year average of 60.1%, according to Seeking Alpha.
That statistic is critical, especially given the current volatility in the macroeconomic environment and the troubling comments from PepsiCo’s CEO during the company’s Q2 earnings call.
PepsiCo CEO Ramon Laguarta said U.S. consumer demand was weaker than the company expected due to gas prices, which pressured budgets and hurt impulse demand.
“Is the volume as much as we expected? No, not in Q2. It’s a couple of elements. I think the consumer is worse than what we had anticipated, and it’s driven mainly by gas prices,” said Laguarta.
Interestingly, BofA analysts argued that instead of weakness on the North American side, they feel sluggishness overseas.
The regional picture is mixed, with BofA lowering Latin America expectations to +1.4% but raising EMEA to +2.3% and Asia Pacific to +2.9%, helped by better trends in Japan. North America stayed steady at +1.5%.
Overall, BofA sees a slow-growth defensive stock that the market is underpricing.
Bank of America sees more upside for Coca-Cola despite modest volume growth.John Nordell
Coca-Cola’s dividend is dependable, to say the least
Coca-Cola has been just as consistent with its dividend as it has been with the nostalgic taste of its iconic soda over the years.
Seeking Alpha data credits the company with 63 consecutive years of dividend growth, compared with a sector median of just 3, and 63 consecutive years of dividend payments versus 20.5 for the sector.
Another thing that stands out to me, especially after its recent dip (down 0.1% in the past month), is its high yield.
According to Seeking Alpha, the stock’s trailing 12-month dividend yield is 2.49%, while its forward yield is 2.54%.
These figures measure dividends paid over the past year compared to its current share price, while the forward yield uses the expected annual dividend.
Interestingly, both figures are sitting below the consumer staples sector. The sector’s median trailing yield is 3.28%, meaning Coca-Cola yields 24% lower, while its forward yield is 21.6% below the sector median of 3.24%.
Coca-Cola’s dividend increased 4.8% over the past year, comfortably ahead of the sector median of 2.82%, with its three-year dividend growth rate at 4.94%, tracking ahead of Coca-Cola’s averages.
Another metric that stands out to me is its cash-flow payout ratio, at 61%, indicating the dividend remains covered by underlying cash generation.
The key numbers behind BofA’s $95 price target
BofA’s new $95 price target, up from $90, implies a 15% upside from the $82.63 share price, indicating considerable room for growth in an otherwise defensive consumer staples stock.
The volume setup is steady, with BofA expecting Q2 unit case volume growth of 2%, close to Visible Alpha’s consensus of 2.2%.
The earnings path backs up the potential rerating case, with EPS projected to rise from $3.27 in 2026 to $3.50 in 2027 and $3.75 in 2028.
The valuation call rests on a 27-times calendar year 2027 estimated EPS multiple, above BofA’s prior 25.5-times assumption.
The dividend case also strengthens, with DPS expected to climb from $2.11 in 2026 to $2.30 in 2028. Source: Bank of America note on Coca-Cola stock
What could break BofA’s bullish KO case
BofA’s upside case isn’t risk-free, though.
The first risk is the obvious, which is the macro volatility we’re seeing in developed and emerging markets, which matters because Coca-Cola’s growth engine is global.
So any demand shock, sluggish consumer spending, or regional disruption will likely clip away at volume stability behind that $95 price target.
Another major risk pertains to currency. BofA flags EPS headwinds from a stronger U.S. dollar, since Coca-Cola earns a massive share of its profits from overseas operations.
Naturally, that points to translation risk; if foreign sales translate into fewer dollars, earnings growth can look much weaker, even if local demand holds up.
The third big risk is consumer concern around sugar and calories. It’s no secret that we’re now in the GLP-1 era, and scrutiny of core carbonated soft drinks has never been stronger, compelling more investment in low-sugar, zero-sugar, and non-CSD brands.
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