4 Beverage Giants Destined to Get Even Bigger
Larry is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Forget all the jokes about liquid assets. Beverage stocks are a good place to be. This is a non-cyclical industry that has solid dividends and good long-term prospects. The best way to invest is in the shares of the four heaviest hitters.
With the middle class expanding rapidly both in Asia and South America, demand for this quartet’s consumable liquids is poised to rise for many years to come. At the same time, the mature markets in the U.S. and Europe provide stability and consistency for their businesses.
Our four companies cover the spectrum of the beverage business: soft drinks, soda distribution, liquor and beer. They are big, and through acquisitions, getting bigger – and thus claiming more market share.
Coca-Cola (NYSE: KO) for instance, the goliath of the soft drink sector, has bought its distributors for years while partnering with companies in emerging markets. Anheuser-Bush (NYSE: BUD) burst onto the global stage when InBev bought it four years ago; it now manufactures nearly 200 brands of beer worldwide. Diageo (NYSE: DEO), the world’s largest hard liquor maker, has quietly acquired smaller competitors like Cabin Fever Maple Flavored Whisky last June. In South America, Coca Cola FEMSA (NYSE: KOF), the largest franchise bottler of Coke products in the world, acquired the beverage division of Mexico’s Grupos Formento Queretano in 2012.
Given the growing world demand for beverage products, there are few bargains to be had. Nevertheless, the industry’s continued growth and much of the world’s improving economic outlook should propel its stock prices higher.
Diageo, headquartered in the United Kingdom, sports such brands as Johnnie Walker, Smirnoff, Bailey’s Irish Cream and Jose Cuervo. They all are the leading brands in their categories sold in 180 countries. Diageo dominates its market. Their well-known brands and strong distribution network give them a formidable advantage in their strongest market, the United States, resulting in a 35% margin, well above their consolidated margin in the high 20s.
They pay a 2.4% dividend with positive cash flow above $6.00 per share. The price for this company is high, with a current price/earnings ratio of 20. But then again it should be that high, with a 35.9% return on equity. The industry average is only 3.8%. Their forward price to earnings ratio is 16.5, which does not seem too high when compared with the current industry average of 32.8. Debt is heavy, with the ratio of long-term debt to equity at 1.32, but cash flow can easily service it.
Anheuser-Bush InBev dominates the global beer market as the largest brewer. The iconic maker of Budweiser, once based in St. Louis before Belgium’s InBev took it over, now has a 48% share in the U.S. market, and in China it ranks in third place – China is projected to account for 40% of global beer growth through 2020. Return on equity is 19%, up from 16%, thanks to a more expensive mix of beers sold these days.
The dividend yield is only 1.5%, but the payout growth was 35% in 2012. Meanwhile, the payout ratio (the amount of net income used for dividends) is only 30%, allowing plenty of room for future increases. Earnings are up 30% year over year, though revenue grew by only 1.8%. Operating cash flow is up 21.6%. While margins were only slightly higher at 31.6% from the prior year, they are well above the industry average. Based on 2013 earnings estimates, the company’s P/E ratio is 17.
Coca-Cola is the world’s soft drink leader, as well as a major player in non-carbonated drinks, an area of significant growth. This includes such brands as VitaminWater, Simply Orange Juice, Minute Maid, Dasani and Powerade. This is especially important in the U.S. where consumption of carbonated beverages is falling. Atlanta-based Coke operates in more than 200 countries and invests heavily in Russia, China and Brazil to generate growth. They earn 70% of their revenue outside of the U.S.
Good news for investors: The company is currently buying back 500 million shares, more than 10% of the outstanding volume. Return on equity, at 27%, is strong but is down from 41% in 2010, as a result of buying their distributors, which carry a much lower ROE. Cash flow is up 15% year over year and the dividend is 2.7%. Their payout ratio is 52%, so the dividend will continue to grow. Earnings are expected to increase 10% in 2013. Their forward P/E is 17.
Coca Cola FEMSA, headquarted in Mexico, is the most expensive of the four stocks highlighted. But as the world’s largest bottler company by volume, it is worthy of consideration at the right price. They have operations in Mexico, Central America, Argentina, Brazil, Colombia and Venezuela. They also recently purchased 51% of Coke’s Filipino bottling company, giving the company a foothold in that dynamically growing Asia market.
Their ROE is 14%, up from 12.5% in 2011, yet that is below the industry average of 24.4%. They have little debt, and operating cash flow grew 8% year over year. Revenue is up 19.3%. The dividend is only 1.3%, but is safe. Earnings are expected to increase 26% in 2012 and then only 13% in 2013. With a forward P/E of over 25, the owners of the shares have been generously rewarded. New participants should wait for a price dip to buy.
This industry is dynamic, meaning you should expect volatility. Still, the major players provide stability and increasing sales and earnings. It is a matter of buying the shares at the right price.
Steve Peasley is president of KPP Financial Inc. in Dana Point, Calif.
KPP owns Diageo in some of its managed accounts.
AdviceIQ has no position in any stocks mentioned. The Motley Fool recommends Diageo plc (ADR) and The Coca-Cola Company. 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!