Dow component The Coca-Cola Company (KO) rallied to a six-week high in Friday's pre-market session after meeting third quarter expectations and reiterating full-year guidance. Revenues rose a healthy 8.3% year over year, while operating margin fell from 29.8% to 26.3%. The beverage giant blamed a strong U.S. dollar and net acquisitions for the margin compression, which it expects to continue into fiscal year 2020.
The stock is trading close to an all-time high after mounting multi-year resistance near $50 in the second quarter of 2019. The 2.99% forward dividend yield has underpinned buying interest since the mid-summer collapse in bond yields encouraged investors to rotate into dividend plays to increase income. This tailwind may continue for several years at a minimum, given the aging economic cycle and a Federal Reserve committed to lower interest rates.
American brands have been resilient around the world despite rising trade tensions, with companies that include McDonald's Corporation (MCD) and Costco Wholesale Corporation (COST) reporting exceptionally strong overseas results. Coca-Cola products continue their domination of international markets as well, suggesting that year-over-year growth in these venues will continue into the foreseeable future.
KO Long-Term Chart (1990 – 2019)
Coca-Cola stock turned sharply higher after the 1987 market crash, entering a powerful trend advance that posted a long series of new highs into the 1998 peak at $44.47. That marked the highest high for the next 15 years, ahead of an orderly downturn that found support at the 200-month exponential moving average (EMA) in the upper teens in the first quarter of 2003. It tested that support level twice into 2006 and turned higher, missing the majority of the mid-decade bull market.
The bounce ended at an eight-year high in the mid-$30s in 2007, giving way to a downdraft that tested the moving average for the fourth time in five years during the 2008 economic collapse. Selling pressure eased just 22 cents above the 2003 low in March 2009, finally ending the decade-long downtrend with a double bottom reversal. It completed a round trip into the prior high in 2011 and broke out, entering the most fruitful period so far this century.
The shallow but persistent uptrend posted a series of new highs that finally reached the 1999 peak in 2014. The stock struggled to build gains above this level until 2018, when the rally trajectory finally steepened, indicating a long-overdue uptick in buying interest. Healthy price action so far in 2019 has posted a return in excess of 16% before dividends, lifting Coke into Dow leadership.
KO Short-Term Chart (2016 – 2019)
The uptrend entered a shallow rising channel in 2014 right after the stock pierced the 1999 high (red line). It crisscrossed that price level repeatedly in the next four years, failing to confirm a breakout. The bullish change in character in 2018 preceded an upside channel break that should now limit pullbacks to the low $50s and the 50-week EMA. However, price action has carved few 2019 downdrafts, and new support still hasn't been fully tested.
The on-balance volume (OBV) accumulation-distribution indicator entered an accumulation phase after a steep decline through the 2016 presidential election and topped out with price in January 2018. It broke out above that peak in February 2019 but reversed quickly, dropping back under the prior high. Bullish price action has ignored this bearish divergence, but the failure indicates that it will take little selling pressure to trigger the next multi-week correction.
The Bottom Line
Coca-Cola stock is trading less than one point below September 2019's all-time high after the beverage giant reported a solid quarter and offered upbeat fiscal year 2020 guidance. The uptick has lifted the former laggard into leadership in the Dow Jones Industrial Average.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.