PepsiCo (PEP -0.41%) just made a major steal from main rival The Coca-Cola Company (KO 0.31%). According to various financial media outlets, including Reuters, starting next season, PepsiCo will become the exclusive food and beverage sponsor of the National Basketball Association in North America. This is a huge announcement, as it will upend the nearly 30-year deal the NBA previously had with Coca-Cola.
Although neither the terms nor the duration were made available, this news represents a big win for PepsiCo. Here's what investors need to know now.
Coca-Cola turns it over
PepsiCo has made sports sponsorship a key component of its branding and marketing strategies over the past several years. PepsiCo is the official sponsor of the NFL, MLB, and the NHL. Adding the NBA to this list cements PepsiCo's ironclad grip on the sports industry.
PepsiCo has registered a number of victories against Coca-Cola over the past year. Earlier this year, Beverage Digest reported that Pepsi had overtaken Diet Coke as the second most popular soda in the United States.
This collection of seemingly small victories has really added up. As you can see in the following graph, it's clear which company has more richly rewarded its shareholders in the past year:
KO 1 Year Total Returns (Daily) data by YCharts.
The reason PepsiCo's total return over the past year has more than doubled Coca-Cola's is because its earnings are growing faster. PepsiCo's revenue and earnings per share grew 4% and 6%, respectively, last year, after adjusting for currency effects.
In comparison, Coca Cola's net revenue was flat last year, after excluding currency effects. Global case volumes of Coca-Cola's sparkling beverages grew by just 1% for the fourth quarter and the full year, and volume for the core Coca-Cola brand was roughly flat for the year. This signals that underlying demand for Coca-Cola products was weak.
The biggest difference between Coca-Cola and PepsiCo is that PepsiCo has a large food and snacks business. In fact, PepsiCo's revenue is now evenly split between food and beverages, which is a huge benefit to PepsiCo since snacks are growing faster than soda right now. PepsiCo's Frito-Lay food business is very strong and putting up excellent growth, particularly in new markets. Organic revenue grew 10% in the Latin America Frito-Lay segment.
In addition, PepsiCo is posting excellent growth in Asia. Revenue increased 8% in Asia, the Middle East, and Africa last year. Overall, as CEO Indra Nooyi stated on the fourth-quarter conference call, revenue in developing markets increased 9% in 2014.
A deal with the NBA would further expand PepsiCo's opportunity in emerging markets. For example, PepsiCo's food and beverage partner in China, Tingyi Holding Corp, will be the NBA's exclusive partner there.
PepsiCo scores again
Thanks to PepsiCo's higher growth, it's greatly increasing the amount of cash it returns to shareholders. PepsiCo increased its total cash returns by 36% in 2014, reaching $8.7 billion of share repurchases and dividend payments.
Meanwhile, Coca-Cola actually distributed less cash to investors last year. The company spent $9.5 billion on share buybacks and dividends in 2014, down 3% from $9.8 billion in 2013.
PepsiCo has produced a much higher total return for its investors than Coca-Cola over the past year. A deal with the NBA would only expand PepsiCo's lead, and it could help further PepsiCo's rapid growth in emerging markets. As a result, PepsiCo investors should be excited by this coup.
