Is It Time to Put a Little Pep in Your Portfolio?

When you think of PepsiCo (PEP 3.62%), you likely think of soda. This makes sense since soda (or sparkling beverages) drove the company's growth for many years. However, PepsiCo's name might be a little misleading, which is a positive for investors. The company is more than just it's Pepsi soda products -- it also owns Frito-Lay, Quaker, Tropicana, Gatorade, and Aquafina. That's what you call top-of-the-line diversification. Let's see how PepsiCo has been performing lately and determine whether it presents a better investment opportunity than Coca-Cola (KO 1.50%) or Dr Pepper Snapple (DPS).

Organic growth
Organic growth is important because it determines whether or not a company's brands have staying power. In the third quarter, PepsiCo's organic net revenue increased 3.3% year over year. In the current market environment, this is above average. Let's break down organic net revenue:

• PepsiCo Americas Foods: Up 7%
• Frito-Lay North America: Up 5%
• Latin America Foods: Up 14%
• Quaker Foods North America: Down 1%
• PepsiCo Americas Beverages: Down 1.5%

That's a net positive. In regard to PepsiCo Americas Beverages, organic volume declined 4%, which is somewhat concerning. On the other hand, Latin America beverage volume improved 0.5% and overall pricing jumped 3%.

Looking at the bigger picture, year-to-date organic snack volume increased 3% and year-to-date organic beverage volume improved 1%. Looking ahead, PepsiCo expects organic net revenue to grow in the mid-single digits. Investors are likely to be content with that, especially considering PepsiCo's reputation for returning large amounts of capital to shareholders.

For instance, PepsiCo expects to return $6.4 billion to shareholders through dividends ($3.4 billion) and buybacks ($3.0 billion) in fiscal year 2013. PepsiCo does expect advertising and marketing expenses to grow at the same pace or faster than revenue, and for interest expense to increase due to a higher debt load. However, at the same time it expects to generate $9 billion in cash flow for the year. Not many companies are capable of such a feat.

PepsiCo vs. Coca-Cola and Dr Pepper
PepsiCo and Coca-Cola are often mentioned in the same sentence. Choosing one over the other is like attempting to choose between a Ferrari and a Lamborghini. They're both great. Consider the similarities in their stock performances over the past decade:

KO data by YCharts.

Coca-Cola is seeing declining demand for its sparkling beverages domestically, which has everything to do with the rise of the health-conscious consumer. However, demand for sparkling beverages is higher overseas. Coca-Cola is enjoying growth in its still beverages all over the world. 

Coca-Cola is also expanding its presence in China, opening its 43rd and largest production facility in China. This 42-acre plant will be located in Hebei and it will produce 2,000 direct jobs and 20,000 indirect job opportunities. This will have a positive impact on the community. With 72.41 million people in Hebei, there is plenty of growth potential. 

If you think Coca-Cola might be fading, first consider that there are 1.8 billion servings of Coca-Cola products sold per day.

With PepsiCo and Coca-Cola, try to look beyond what these companies currently offer. They're constantly innovating to offer products that match current consumer trends and their marketing power is enormous. Therefore, their potential is always high. If there's a slow stretch, then investors can collect somewhat generous yields while waiting for the next hot product launch or acquisition to drive the top line. 

Dr Pepper Snapple is also seeing declining demand for sparkling beverages. However, the company recently stated that it has maintained its share in the market and that its Core 4 TEN brands are winning consumers back. This pertains to A&W, 7UP, Sunkist, and Canada Dry offering cans and bottles with just 10 calories. This is expected to increase demand due to the rising health-conscious consumer. 

In the third quarter, Dr Pepper Snapple saw net sales increase 1% year over year. Core earnings per share increased 11% to $0.88, and the full-year core EPS expectation has been reaffirmed for $3.04-$3.12. In the third quarter, Dr Pepper Snapple returned $468 million to its shareholders. 

Let's take a look at some key metric comparisons:

Source: Company financial statements.

It would be extremely difficult to find three companies as similar as these three when it comes to key metric comparisons. 

The bottom line
PepsiCo's product diversification and organic growth, as well as Coca-Cola's brand strength/international growth potential, are likely to make these two companies better investments than Dr Pepper Snapple going forward. However, all three are likely to remain long-term winners, and that 3.30% yield for Dr Pepper Snapple is tempting.