Soda has been an American staple for several decades now. Over the last few years, however, the obesity epidemic (rightly or wrongly, depending on who you ask) has brought soda under fire socially. As a result, soda sales are slowing and the earnings of the industry giants are stalling a bit. Does this mean soda companies are no longer worth investing in?
This look into the major players of the industry may provide some answers.
About 87% of the soda consumed by Americans is produced and sold by three companies.
- Coca-Cola (NYSE:KO) leads the way with a market share of 37%.
- PepsiCo (NYSE:PEP) is close behind with a market share of 30%.
- Dr. Pepper Snapple Group (NYSE:DPS) brings up the rear with a market share of 20%.
Brand power across the globe
Source: Yahoo! Finance
Coca-Cola trades at a price-to-earnings ratio of 21.15 times. This valuation is a premium to the industry, as well as the S&P 500 (which trades with a price-to-earnings ratio of 18.1 times). Coca-Cola is known for trading at a premium. It is perhaps the most powerful brand in the world, and it continues to grow its earnings through any economic environment.
Coca-Cola is also a dividend machine--this year marked its 51st straight annual dividend increase. The annual dividend of $1.12 will yield you 2.79% at current prices. The dividend payout ratio is 55%, which indicates room for further dividend growth. The dividend has grown at a rate of 9.8% annually over the last 10 years, giving shareholders inflation-beating growth.
Coca-Cola is truly an international business. It's sales volumes are spread out almost evenly across the world.
- North America: 21%
- Latin America: 29%
- Europe: 14%
- Asian Pacific: 18%
- Eurasia & Africa: 18%
Coca-Cola is earning an 18.25% net profit margin, as well as a 26.68% return on equity. Coke does have a 1.1 total-debt-to-equity ratio, but has increased borrowing in a low interest rate environment. With $2.34 of cash flow per share, Coca-Cola has the ability to keep its debt under control.
Coca-Cola's 2020 vision is a 10-year plan that the company developed in 2009 to double its system revenues in 10 years. Management is optimistic that things are on course to meet these goals, with annual revenue, volume, and profit goals being met or exceeded.
Driving forward with diversification
Source: Yahoo! Finance
PepsiCo trades at a price-to-earnings ratio of 19.74 times. This is fair value to the sector, and a slight premium over the S&P 500 as a whole. PepsiCo is similar to Coca-Cola in a lot of ways. It sells economically-resilient products through a portfolio full of industry-leading brands.
PepsiCo has a been a great dividend growth stock for a long time. It currently pays a dividend totaling $2.27 a year, which yields 2.70% on current trading prices. This dividend equates to a 51% payout ratio. It has also been consistently growing, with 41 straight annual increases. It has grown 13.6% annually over the last 10 years.
PepsiCo brings in a 30.63% return on equity, with a net profit margin of 10.14%. The company carries a total-debt-to-equity ratio of 1.3 (which a little high), but with $6.00 of cash flow per share it has the cash resources coming in to pay down this debt while maintaining operations growth.
PepsiCo is looking to expand through growth in developing and emerging markets. As of 2012, Pepsi receives only 35% of its revenue from emerging markets. This figure stands to increase as the company pushes its snack and beverage businesses into developing markets such as China, Africa, and Latin America.
An underdog that provides value
Source: Yahoo! Finance
Dr. Pepper Snapple is currently trading at a price-to-earnings ratio of 15.93 times, which is a discount to both the sector and the S&P 500. Its price/earnings-to-growth ratio is 2.1, meaning that the earnings growth of Dr. Pepper Snapple is trading at a better value than that of both Coca-Cola (2.7) and PepsiCo (2.4).
Dr. Pepper Snapple is a much younger entity and doesn't have the rich dividend growth tradition of the other two. In a mere five years, however, the company's dividend has gone from $0.15 per share in 2009 to $1.36 per share in 2013. This dividend yields higher than Coca-Cola and PepsiCo, and on top of that checks in with a payout ratio of only 48.5%. This puppy has room to stretch its dividend legs (and beats out Coca-Cola and Pepsi on dividend returns).
Financially, Dr. Pepper Snapple lives in the same neighborhood as PepsiCo and Coca-Cola. It carries a total-debt-to-equity ratio of 1.1, has a net profit margin of 10.14%, and achieves a 26.53% return on equity.
Dr. Pepper Snapple is an interesting prospect. It is moving in the right direction, and has the core brands of a solid portfolio (Dr. Pepper, Snapple, 7UP). Due to this, Dr. Pepper Snapple has some possible growth catalysts in its valuation, smaller size, and competitive brand portfolio.
The bottom line
Even with the soda industry hitting a slight slowdown, you shouldn't shun these three industry stalwarts. If you look past their names, you will find immense brand portfolios that can drive growth moving forward domestically, as well as in emerging markets. Whether it's the international presence of Coca-Cola, the diversity of PepsiCo, or the valuation and shareholder returns of Dr. Pepper Snapple that interests you the most, each company deserves a look.
Justin Pope has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!