Which Soda Giant Is the Best Dividend Stock?

"The greatest ideas are the simplest"

-William Golding

The goal of every income investor should be, first and foremost, to find great businesses. Lucky for us, this seemingly difficult task can be as simple as rummaging through your kitchen.

According to Beverage-Digest, The Coca-Cola Company  (NYSE: KO  ) , PepsiCo  (NYSE: PEP  ) , and Dr Pepper Snapple  (NYSE: DPS  ) , collectively, account for more than 70% of all liquid refreshments sold in the U.S. -- PepsiCo also dominates the U.S. snack industry through its subsidiaries Frito-Lay and Quaker. 

However, while strong brand names, powerful market positions, consistent earnings, and loyal customers make for great businesses, for one of these companies to be considered the best dividend stock, it will need to jump extra hurdles – five to be exact.

1. Cash Dividend Payout Ratio
This ratio tells us how much of the companies' cash flow is going toward paying dividends. It works two fold: first, it tells us whether or not the companies' are generating cash, and second, what percentage is going toward dividends.

KO Cash Dividend Payout Ratio (TTM) Chart

Source: YCharts.

As a rule of thumb the cut-off line for a safe payout ratio is about 65%. This ensures that if one of our companies hits a speed bump they won't have to cut their dividend, and if earnings slow, the company can still safely increase its dividend.

Ultimately, I'll take Coca-Cola and PepsiCo's historical consistency over Dr Pepper's currently more attractive payout ratio. 

2. Debt
Using debt can help companies grow more quickly and take advantage of opportunities. Though, when push comes to shove, paying interest on loans takes precedence over distributing dividends.

Debt is also relative, for instance, PepsiCo is about 10 times the size of Dr Pepper, so it's going to carry more debt. To level the playing field investors can use the debt-to-equity ratio. The lower the ratio, the less the company depends on debt for financing.

Coca-Cola, PepsiCo, and Dr Pepper have a debt-to-equity ratio of 1.1, 1.2, and 1.1, respectively. All very low, suggesting none of the companies should have a problem managing debt -- I'll consider round two a tie. 

3. Stock price performance
Dividend stocks aren't bonds, and falling stock prices can easily wash away returns. That's why it's important to focus on total returns (dividends plus stock appreciation). While past performance doesn't always predict future returns, investors should want a stock that consistently appreciates relative to the S&P 500.

KO 3 Year Total Returns Chart

Source: YCharts.

Despite not one of three companies outperforming the S&P 500, Dr Pepper has been the strongest performer. However, it should be noted that during the financial crisis (2008 to 2009) Coca-Cola and PepsiCo performed much better than the S&P 500. Which is a good sign of stability during lean times. 

4. Opportunities for growth
Considering the widespread health campaigns against soda, it's probably not surprising to hear U.S. carbonated soft drink consumption is down for the ninth straight year, according to Beverage-Digest.

However, Coca-Cola and PepsiCo's strong financial position allows them to adapt to consumer trends. For instance, Coca-Cola owns Minute Maid, Honest Tea, and Odwalla, while among PepsiCo's healthier options are Tropicana, Quaker, and Naked. 

Moreover, U.S. opinions on soft drinks don't necessarily extend internationally. In fact, according to The Wall Street Journal, Coca-Cola and PepsiCo derive about "60% and 50% of their revenue from abroad, respectively."

Ultimately, while Dr Pepper is the smallest, and has potentially the greatest opportunity to steal market share, it's Coca-Cola and PepsiCo's strong international distribution channels that gives them an enormous edge.

5. Dividend growth
Every year a business doesn't increase its dividend, inflation steals some of its buying power. This is why investing in companies dedicated to consistently raising its dividend is essential. 

Since 2010, Dr Pepper has grown its dividend by an incredible 170% -- though, it's unlikely the company can maintain such a savage pace. Coca-Cola and PepsiCo, on the other hand, have managed a more moderate, but still impressive, 49% and 46%, respectively. 

Moreover, Coca-Cola and PepsiCo are "dividend aristocrats," and have raised their dividend for more than 25 consecutive years. 

Dr Pepper Snapple has shown the most growth of late, however, the company does rely on Coca-Cola and PepsiCo licensing agreements for distribution.  While this improves brand recognition, Dr Pepper won't develop the same relationships with vendors and retailers.  

With that said, I think the "dividend hurdles" make it a toss-up between Coca-Cola and PepsiCo, and I favor the more diversified product offerings of PepsiCo. I think the strong market position in carbonated drinks (Pepsi/Mt. Dew) and non-carbonated drinks (Gatorade), as well as its globally strong snack business, gives PepsiCo the ability to navigate any future downturn or change in consumer preference.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2983182, ~/Articles/ArticleHandler.aspx, 9/5/2015 6:34:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dave Koppenheffer

Dave Koppenheffer, is a contributor for the Motley Fool's financial sector. And much like Dwayne "The Rock" Johnson, when he speaks, he speaks with an earnest vibe and an earnest energy.

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:01 PM
DPS $75.77 Down -1.18 -1.53%
Dr Pepper Snapple… CAPS Rating: ****
KO $38.52 Down -0.64 -1.63%
Coca-Cola CAPS Rating: ****
PEP $90.92 Down -1.21 -1.31%
PepsiCo CAPS Rating: *****