Which Beverage Stock For Biggest Gains?

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Soft drinks provide cool refreshment for many people. Stock in companies like Coca-Cola (NYSE: KO), PepsiCo (NYSE: PEP) and Dr Pepper Snapple Group (NYSE: DPS) also offers something nice: growth and dividends to investors. While demand for soft drink stock remains high, debt has become a factor in deciding which company represents the best investment.

Dr Pepper Snapple is the smallest of these competitors, and it does not enjoy the big brand name boost of its rivals. However, the company has been keeping pace quite nicely. Although its share price only gained 1% in the past 12 months, the company ended the year with a bang, enjoying increases in both revenue and earnings, 3.5% and 48.2%, respectively. These numbers are due to heightened demand and a price increase.

Dr Pepper helped its brand recognition with a Super Bowl commercial. The company also entices investors with the largest dividend yield of these three at 3.5%. The company currently has a payout ratio of 44%. Although it is not a dividend aristocrat, the big payout at Dr Pepper recently earned it recognition as a leader on the Dividend Channel’s “DividendRank” report.

The concern with Dr Pepper Snapple is not its dividend. Rather, it involves the company’s hefty debt situation, which is becoming unsettling. With $709 million in cash and a total debt of $2.7 billion, this deficit raises concerns about the company’s ability to maintain and expand operations without taking on more expense, a risky move if it cannot get low-interest money from creditors. I like the fact that the company’s director recently purchased 1,000 shares of Dr Pepper stock, but the debt situation is going to scare other investors from doing the same.

Sitting at number 22 on the 2011 top Interbrand list, the PepsiCo brand is worth nearly $15 billion. The company has managed to build its reputation in the marketplace, while also building its status on Wall Street, creating growth and dividends while it bottles Mountain Dew and Pepsi Next, the latest low-calorie beverage in its lineup.

Pepsi has done an excellent job of expanding its reach to private consumers. The company has also excelled in the corporate sector. Pepsi has exclusive distribution agreements with companies such as YUM! Brands (which includes Pizza Hut, Taco Bell and KFC), not only with its beverages, but also with Frito-Lay, PepsiCo’s snack unit.

Although its share price has been flat over the past year, the real concern lies more with its growing debt. The company’s debt to equity ratio is still manageable at 128, but its total debt of $26.8 billion is nearly six times its $4.4 billion in cash. PepsiCo is addressing these concerns in 2012, as the company undertakes a restructuring effort (including layoffs and increases in advertising) that many expect to improve profitability in 2013.

With a market cap ($157 billion) that is almost 50% higher than Pepsi ($99 billion) and Dr Pepper ($8 billion) combined, Coca-holds the most stable position in the soft drink industry. The company has been successful in gaining access to areas from Panama to Mongolia, giving it access to billions of potential customers. Coca-Cola is the most valuable brand in the world, with an estimated worth of $72 billion, while Coke and Diet Coke are the two top sellers in the market.

These factors are just a few of the reasons that Coke has dominated the soft drink industry since 1980s. The company combines steady growth and solid dividends in a mixed stock that investors love. Currently paying $2.04, for a yield of 2.9%, Coke is a dividend aristocrat, as is its rival Pepsi. This distinction gives both manufacturers additional power with investors.

Coca-Cola is also a very good risk among those rating credit, as Fitch Ratings gave the company a highly desirable A+ rating for its planned issuance of $2.75 billion in notes. This funding, approved due to the company’s reputation for generating cash flow, is being used to repay commercial paper.

I like Coke as an investment, both short-term and for the long-term. Although the company’s earnings dropped 71% in the 4th quarter, a strong fourth in 2010 and higher advertising costs were largely to blame. The stock has been trading above its 200-day moving average since late January, and analysts are predicting a 10% gain in share price over the nest 12 months. Of these three companies, Coke has the most total cash at $14 billion, and the debt to equity ratio of 89 is lower than either of its competitors. This is a solid company that just keeps performing.

Considered by many to be a recession-resistant industry, soft drinks can offer solid profits to investors. Much like public utilities and alcoholic beverage manufacturers, soft drinks are not highly affected by downturns in the economy.

Each of these companies is very good, and compelling cases exist for investing in any of them. The companies all offer growth in share price, solid dividends and the kind of reputation among investors who breeds confidence. I am most bullish on Coca-Cola, primarily due to the company’s economic moat (#1 in the industry with the top two colas on the market) and its lower debt. It is a fine line that separates the leaders in this market, and I believe Coke’s better debt numbers make it the best choice.


The Motley Fool has no positions in the stocks mentioned above. BobbyFisher has no positions in the stocks mentioned above. 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.

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