Rising With The Fizz

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

A certain beverage has taken the world by storm ever since its introduction in the 19th century. Coca-Cola (NYSE: KO) is arguably the most recognizable brand in the entire world. It is quite amazing that a black sugary drink would have such power.

The company’s earnings in Q3 were not exactly spectacular, but its earnings grew year-on-year by 3.9%. This isn’t exactly a bad performance considering the global macro-economic climate.  It is interesting to note this, because I doubt anybody in the world would consider Coke to be an “essential” commodity. I have mentioned previously that consumers, regardless of economic conditions, are loathe to cut down on certain essentials – food, for example. Coke doesn’t come close to the tag of essential in my book, and I’m sure most people would agree. So how is it that this drink has managed to do so well, despite, essentially, having no utility?

The company experienced healthy results in North America, but its overseas business was dampened by China's anemic 2% increase in sales volume for the quarter, as compared to more than 10% a year earlier. Coke's CEO Muhtar Kent made comments in the conference call on Oct. 16 suggesting that China's government has been focused more on trying to tamp down inflation and not on economic growth.

However, Kent did make a statement saying that the weak growth in China would definitely have a short term effect on the performance of the company. Essentially, what he is doing is cutting down on expectations for the fourth quarter. That's why this may prove a good entry point for people who are interested in picking up shares in Coke. It is worth noting that Warren Buffet’s Berkshire Hathaway owns nearly 9% of outstanding shares of the company. If an investor as shrewd as him clearly sees some value in the company, it's worth taking a look at the company.

The company mainly sells products under the followings brands – Coca Cola, Diet Coke, Fanta, Sprite, Coca-Cola Zero, Vitamin Water, PowerAde, Minute Maid, Simply, Georgia, and Del Valle. A point to note is the fact that technically the only product that doesn’t have adverse effects to consumer’s health is Minute Maid. Recent studies have linked Coca-Cola to heart disease and obesity; not exactly encouraging news.

However, the company has one eye forward and is taking into account consumer consumption trends. The company has entered into a joint partnership with French pharmaceutical company Sanofi to launch a new line of drinks to promote health and beauty.

The drinks, called Beautific Oenobiol, which is Sanofi's nutrition and beauty brand, will debut in France in pharmacies in autumn. The falling leaves should spell rising revenue for both companies, and Coke should be more than able to sustain its $1.02 annual dividend, which represents a relatively high 52% payout ratio.

Quite obviously, most investors will look at the other company that makes a black fizzy drink. Stand up, Pepsico (NYSE: PEP). Similar to Coke, the company depends a lot on international markets, and especially China. It is interesting to note that Pepsi has replaced the number 1 selling Cola in the country, and its volumes increased by 5%.

Pepsi managed to leap to the top spot after it sold its Chinese bottling operations to Tingyi and Asahi. The company's performance since then has been outstanding, as Tingyi and Asahi have gone on to help the brand reach the top spot in China. It is a key market that Pepsi seems to have cornered.

Another company that operates in the same space is Dr Pepper Snapple Group (NYSE: DPS). In the company’s recent third quarter results posted on Oct. 24, earnings per share grew to $0.84 per share, up almost 13% from 2011 third-quarter earnings of $0.71 per share. Sales volume decreased, but this was offset by higher prices, leading to net income increasing 16% to $179 million.

However, Dr Pepper is facing a lot of different challenges. The company has not released any suggestions that it will expand further internationally, which currently includes Mexico, Canada, and the Caribbean. Additionally, the Dr. Pepper TEN brand, which was introduced in 2011 and was hoped to be a growth opportunity for the company, is falling short of expectations. The company is braced for higher input costs as well, thanks to increases in the price of apples, which will affect its Snapple brand.

The challenges facing all of these companies are pretty straightforward – slow growth in international markets means lower sales volume. But which one of these companies will you pick? Naturally, Coke is the most recognizable brand and a behemoth in the space, but if you look at dividend payout Pepsi performs better. Pepsi’s dividend yield in the most recent quarter was 3.10%, as opposed to Coke’s 2.70%.

However, Coke’s outlook for the next quarter may see the price drop, which means that it could be a good time to pick up stock in the company. The company hasn’t been skittish in dividend payments either, and still seems to have Warren Buffett’s stamp of approval. Shareholders won't be biting their nails or breaking out in a sweat about Coca-Cola's financial might. With more than $18 billion in total cash as of the most recent quarter, trailing 12 months operating cash flow of $10.51 billion, and trailing 12 months levered free cash flow of $6.42 billion, it should remain a solid choice for growth-at-a-reasonable price for years to come.


ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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