A 6.5% Increase in the Producer Price Index Is No Match for Coca-Cola Stock

Perhaps lost in the shuffle of the June 11 risk-on equity market rally -- one fueled in part by the White House saying it nixed military strikes against Iran -- was the May reading of the Producer Price Index (PPI) released early in the day.

The report wasn't pretty. It showed a 1.1% increase, meaning the wholesale inflation rate over the prior 12 months was 6.5%, the highest level since November 2022. Typically, companies' higher input costs are passed on to shoppers, suggesting some vulnerability for consumer staples stocks. That's not the case across the board. Just look at Coca-Cola (NYSE: KO).

Coca-Cola is one consumer stock with buffers against rising producer prices. Image source: Getty Images.

Outpacing the S&P 500 by a margin of more than 2-to-1 this year, the beverage stock hit a 52-week high the day before the PPI report. That's not a coincidence. Rather, it's a testament to Coca-Cola's execution prowess amid a tough operating climate.

Not just a pricing power story

As noted above, companies across a variety of industries often raise prices on customers to offset higher producer costs. Due to its enviable brand recognition and status as the purveyor of multiple premium soft drink brands, Coca-Cola could probably get away with some price hikes to soften the blow of elevated input costs. Still, the company isn't leaning on that option.

That's to the benefit of both investors and shoppers, because rival PepsiCo went down that road and lost billions of dollars in sales as cost-sensitive consumers said, "Enough is enough." Well-run companies learn from rivals' missteps, and Coca-Cola appears to have learned valuable lessons from Pepsi's pricing gaffes. Indeed, Coca-Cola is facing some inflationary headwinds, including constrained aluminum and plastic supplies due to the war in Iran.

For investors, the good news is that the company has levers it can pull to juice sales without pinching consumers. Those include pushing drinks that are less commodities-intensive (less sugar). Those moves are working because some on Wall Street say Coca-Cola is somewhat "insulate" from inflation-induced cost pressures and can maintain its appeal to both high-end and cost-conscious consumers.

Consider this. On June 10, Morgan Stanley named Coca-Cola its top pick in the beverage space, with one of the reasons for that bull call being the company's ability to hold prices in the face of inflation in superior fashion relative to some rivals.

Don't forget the dividend

Another point of allure with Coca-Cola is its status as a blue chip dividend stock. The shares yield 2.6%, and the payout has grown for 64 consecutive years. Obviously, a six-decade-plus run of steadily rising dividends is impressive in its own right, but it pays to dig deeper.

Typically, consistent dividend raisers are high-quality companies that can offer investors some protection when markets turn sour.

Coca-Cola's dividend growth is also relevant in the inflation protection conversation. The stock's 2.6% yield matches the average rate of inflation over the past two decades, and it's well above the five-year forward breakeven level of 2.2%. At the end of the day, no stock is the "perfect" inflation fighter, but long-term investors looking for a friend in the face of rising prices may want to give Coca-Cola a look.

Todd Shriber 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.