Beverage companies Coca-Cola (KO 1.50%), PepsiCo (PEP 3.62%), and Dr Pepper Snapple Group (DPS) dominate the industry landscape. However, Coca-Cola and PepsiCo stand out as the two best investments among the giants; here's why.
|
Company |
YTD revenue |
YTD free cash flow |
Cash and Short-Term Investments |
Cash + ST Inv. to SE |
Long-term debt-to-equity ratio |
|---|---|---|---|---|---|
|
Coca-Cola |
$35,814 |
$6,151 |
$17,257 |
53.2% |
43.7% |
|
PepsiCo |
$46,297 |
$5,216 |
$9,559 |
42.7% |
108.4% |
|
Dr Pepper Snapple |
$4,534 |
$501 |
$119 |
5.2% |
109.2% |
Source: SEC filings and author's calculations.
Financial strength and ubiquity
In the table above you can see that Coca-Cola and PepsiCo possess financial strength and ubiquity. Coca-Cola's and PepsiCo's revenues exceed Dr Pepper's revenue by eight and 10 times, respectively. Coca-Cola's cash stash exceeds both companies by a wide margin and the company possesses the least amount of debt as a percentage of equity. Coca-Cola, PepsiCo, and their bottling and distribution partners also maintain ever-increasing global presence, expanding into areas such as Eastern Europe, India, China, and the Philippines. In addition, Coca-Cola and PepsiCo maintain a presence in two of the world's largest restaurant chains -- McDonald's and Yum! Brands -- via fountain dispensers. Dr Pepper Snapple Group by contrast operates mainly in the Western Hemisphere and usually only warrants one or two spots in a soda fountain usually hosted by PepsiCo or Coca-Cola.
Diversity
PepsiCo and Coca-Cola also sport the most diversity in their respective product portfolios. Note from the table above that PepsiCo sports the highest amount of revenue, most likely due to the fact that PepsiCo also sells snacks and food in addition to beverages. PepsiCo owns the Frito-Lay and Quaker Oats brands, which serve as a buffer against declining carbonated soda demand. Still beverages also make up 11 of Coca-Cola's 16 most significant brands. Dr. Pepper Snapple Group does sell the Mott's brand, which represents a healthy beverage and snack brand. However, Dr Pepper Snapple Group is making efforts to expand its healthier offerings, such as the partnership with Sunny Delight Beverages to sell Sparkling Fruit2O and Bai Brands fruit based infusion drinks.
Dividends
Actually, on the dividend front Dr Pepper Snapple Group is the winner, with a 3.1% dividend yield. Coca-Cola and PepsiCo each yield 2.8% as of this writing. However, Coca-Cola's dividend payment resides in the safest position, with $17 billion in cash and short-term investments. Coca-Cola's dividend-to-free cash flow ratio resides at the lowest level, paying out 41% so far in 2013. PepsiCo and Dr Pepper Snapple Group paid out 49% and 44%, respectively, of their year-to-date free cash flow.
Foolish takeaway
Coca-Cola, PepsiCo, and Dr Pepper Snapple each face headwinds from the healthy-lifestyles movement. Increased consumer awareness about the health effects of carbonated sodas in addition to increased scrutiny and regulations from governments around the globe will force each of these companies to rethink their strategies and product portfolios. Coca-Cola and PepsiCo, with their relative balance-sheet strengths in terms of cash and debt, are in the best position to do that, making them a better investment than Dr Pepper Snapple Group.
