Let the Stock Market Pick Your Favourite Soft Drink For You

Increased focus on the health problems and the dangers associated with consuming high amounts of sugar have severely affected soda consumption patterns in the developed world. Yet ever since its spin-off from Cadbury Schweppes five years ago, Dr. Pepper Snapple Group (NYSE: DPS  ) has outperformed PepsiCo  (NYSE: PEP  ) and Coca-Cola (NYSE: KO  ) , despite being an underdog.

Dr. Pepper Snapple Group has a market valuation of $8.8 billion. This is much smaller than its mammoth rivals Pepsi at $122.8 billion and Coca-Cola at $164.9 billion. Valuation measures also suggest that Dr.Pepper is undervalued in comparison to its competitors. Furthermore, Dr. Pepper's dividend size and payout ratio has increased massively over the last four years, and the company sports a handsome 3.40% yield.

Indicator

Dr. Pepper Snapple Group

PepsiCo

Coca-Cola

P/E TTM

14.8

18.8

19.6

Forward P/E

13.0

16.2

16.0

PEG Ratio

1.6

2.0

1.9

Operating Margin % TTM

18.0

14.5

22.3

Dividend Yield, %

3.40%

2.78%

2.94%

Current Price

$43.47

$79.62

$37.20

However, events of the past rarely dictate future performance for stocks. I like to look at the organic growth potential that a company can capitalize on. Dr. Pepper has no European experience and it only sells its products in the United States, Mexico, and some areas of Latin America. While this is an intrinsic handicap that reduces the number of customers, as things stand it might be a blessing in disguise since this also keeps the company protected from the continuing European crisis.

Growing awareness
As I mentioned at the start, the prevailing trends for beverage stocks have reversed this year. Whereas Dr. Pepper was dominant before with its cost savings, PepsiCo is now the emerging soft-drinks leader in the stock market. Over the course of one year, Pepsi's share price has grown by 12.35%, while its competitors have clocked in the negative.

The soda consumption level has declined to the lowest level since 1996  in the United States. This is absolutely a concern for Dr. Pepper because Coca-Cola and Pepsi also have larger global presences in Asia and Europe that can offset the decline in US consumption. In fact, Pepsi has stepped up its marketing and advertising in Middle Eastern and developing countries that have not yet reached saturation for soda consumption.

Growth prospects
To gauge the growth prospects of Coca-Cola and Pepsi, it is essential to note that while Coca-Cola has remained steadfast in its position as a purely sparkling beverage company, Pepsi has successfully branched out into other product areas. Coca-Cola's continuing focus on beverages is evident by the fact that beverages make up approximately 75% of the company's revenue. On the other hand, Pepsi's revenue is more balanced between food and beverages; last year, the food-beverage mix was 51% and 49%.

Pepsi should consolidate its presence in the emerging market of India, where its water, food and beverage products are in high demand. Unfortunately, though, the company has been losing its market share in the Indian snacks market, declining from 69.7%  in 2008 to 56.8% in 2012. In Thailand too, Coca-Cola has reclaimed the market leader title from Pepsi in just two years.  

Coca-Cola  has been in the news for having been passed by Apple as the world's most valuable brand. At the same time, there has been negative press regarding the harmful and excess amounts of sugar present in its products. While Coca-Cola sales have declined in developed and developing countries, the company's expansive product portfolio is keeping it afloat amid trouble on the image front. Coca-Cola has had a solid brand image over decades with loyal customers who continue to pick Coke over its rivals; as their loyalty continues to be questioned over the harmful effects of the company's sodas, there will be increased reliance on the company's sub-brands.

Verdict
Growing awareness in the U.S. population about the harmful effects of sodas and colas is already hurting these three beverage companies. However, this effect is felt more strongly by Dr. Pepper since its market is limited to primarily North America. While the company's impressive dividend yield and payout increase makes a case for investment in the oldest major soft drink manufacturer in America, intrinsic growth and negative consumer preferences outweigh the benefits.

Similarly, Coca-Cola and Pepsi have also seen their sales decline in the U.S. , but access to international markets makes their stocks less susceptible to sudden changes. Alongside price stability, Pepsi is also making inroads with its food products into Asian emerging markets. Its recent advertisement campaigns are focusing on the burgeoning youth demographics of the Middle-Eastern and South Asian regions. While Coca-Cola is undoubtedly an investor favorite with its continued dividend payout and solid organic growth, the brand is currently in hot water with its beverages business.

While Coca-Cola and Pepsi are two brilliant stocks to own, I believe Pepsi's growth into the food sector has given it the upper hand.


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