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Soda stocks may be consumer staple defensives but they're on the defensive thanks to a constant clamor of "soda is bad for you" headlines. Investing in them requires you to know just what they're up against. Can they profit despite declining soda consumption trends? Some troubling questions follow.
- Can soda make children more aggressive?
- Are diet sodas worse for dieters than sugar sodas?
- Do soda drinkers have a higher risk of stroke?
- Can drinking diet soda increase the risk of diabetes?
The answers, according to scientific studies, are all yes.
- A study showed five year olds were more prone to aggression the more soda they consumed.
- A decade long study proved diet soda drinkers were 65% more likely to be overweight in seven to eight years.
- Adults drinking one or more sodas daily had a16% higher risk of stroke .
- One diet soda weekly can increase risk of diabetes by 33%.
Although the US is the largest consumer of soda, there has been a concerning downtrend in consumption as a new generation eschews pop. Pediatricians are making it a standard question at well child visits, "Does your child consume sodas?", and if the answer is yes advising parents to cut it down or out entirely.
Flat to down sparkling (as the companies call soda or CSDs) sales have been noted on many quarterly earnings calls. Dr Pepper Snapple CEO Larry Young summed it up best on the second quarter earnings release," Changing consumer behavior takes time, and we remain committed to giving consumers a reason to come back to the CSD category." Diet soda sales have seen even worse declines as detailed by Fellow Fool Brian Stoffel.
There has been good reason to hold these. Coca-Cola has been a long term hold for Warren Buffett with three year gains of 57.3%. PepsiCo has given investors 46.82% share price appreciation over three years but Dr Pepper Snapple Group has outpaced these other two with 73% gains. As seen on the chart dividend growth has rewarded shareholders as well.
Beside the headline noise there is some good news.
The good news is these companies have been expanding non-soda choices. Dr. Pepper Snapple offers 70 different choices of Snapple's non-carbonated refreshment. It also offers Mott's juices, Clamato, alcoholic beverage mixers, lemonades, and ready-to-drink teas for over 50 brands. The company recently introduced its TEN platform, diet versions of their core soda brands that so far is trending well.
Coca-Cola has been experimenting with stevia as an alternative to artificial sweetener aspartame which has come under fire. The company went on the defensive with a print ad campaign to reassure consumers of the ingredient's safety. Coca-Cola been expanding its brand portfolio as well with lines of functional waters, energy drinks, teas, a new herbal drink, and fruit juices. You might be surprised to learn Coca-Cola has 28% share of the US market for not-from-concentrate OJ. PepsiCo holds 40% share of that same OJ market.
PepsiCo has been no slouch with an ever-growing line of non-carbonated beverages and food brands, not just Frito-Lay snacks and Quaker products but cereals and side dishes, too.
The market values Dr Pepper's forward earnings at 13.78, the lowest of the Big Three soda companies. However the stock is down 1.32% for the last year and short interest is the highest at 4.70% and increasing.
Analysts predict 7.53% five year EPS growth year-over-year. That number may be too low with the new line of diet sodas and promotional activities. Last year they initiated a wildly successful Facebook Credits promotion which it is continuing this year in which consumers redeemed cap codes for Facebook credits.They have also been reaching out to Hispanics with nationwide community events.
Dr Pepper has increased their dividend five times since 2009 boosting it by 12% in 2012. You'll also notice from the chart that Dr. Pepper's dividend has grown by153%. The yield now stands at 3.40% at the lowest payout ratio of these three companies at 46%. The company has been buying back shares, $2 billion worth since 2010 with another $400 million scheduled this year.
Coca-Cola holds the number one rank in the Interbrands annual 100 Best Global Brands for 2012. It offers a 2.90% yield at the highest payout ratio of these three at 57%. But don't worry about that; Coca-Cola is a Dividend Aristocrat and has raised the yield for 50 years straight.
The forward earnings multiple is 17.08. Its operating margin is the highest of these at 23.44 % but five year EPS growth is expected to be only slightly higher than Dr Pepper at 7.90%.
PepsiCo is the best performer, up 8% over the last year even as Coca-Cola and Dr. Pepper Snapple were down over 1%. PepsiCo may have the the lowest yield at 2.80% but the payout ratio is 51%.
Its forward earnings multiple is 17.10 and analysts give it the highest five year EPS growth prediction at 8.30%. Analysts may be right as PepsiCo has also been taking its food brands to a new level of healthfulness even offering a Quaker quinoa bar.
Extra credit for global expansion
Growing overseas is part of the answer to offset US soda declines. Coca-Cola global volume rose 1% in the second quarter but saw a hiccup in the usually stronger Asia and Latin America volumes. However, it has 3,500 global products in 200 countries.
Net sales overall were flat for Dr Pepper in the second quarter but noted Mexican and Caribbean volumes rose 2%. Dr. Pepper plans to expand beyond the North American market and they recently purchased Australian and Asian distribution rights for Snapple.
Meanwhile PepsiCo reported gross margin expansion of 110 basis points and 17% growth in EPS to $1.31 for the second quarter. Organic revenue grew 14% in Asia, Middle East, and Africa and 12% for Latin America Foods.
Put your pencils down!
My final answer on the state of soda stocks' health is buy Dr Pepper for high yield and most upside with its global plans and promotions. Coca-Cola doesn't have a food buffer like PepsiCo and so may just tread water. Globally, PepsiCo is the strongest as well as building out a strong portfolio of healthful brands but Dr. Pepper has more room to grow.
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