Soda Pop Concerns: Should You Pour Out of Beverage Stocks?

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America is a consumer nation. Let's just face that. My ballooning up to the size of a blimp and then having to work to lose most of it (more than 100 pounds so far) is testimony to the fact that I'm a part of it as well.

The real question becomes WHAT is being consumed. Sugary snacks, drinks and so forth have been a strong win in that category for decades. But there are signs that might be coming to an end. Sure, soft drinks are everywhere, but who's to say it'll stay that way? America's love affair with carbonated sugar water just might be ramping down.

So what's an investor to do? Can you count on a certain level of return from these stocks or is it time to drop them like Michael Bloomberg hopes to compel everyone to do? Unsurprisingly, I have a few thoughts on the subject.

The Coca-Cola Company (NYSE: KO)

Coke is clearly under some pressure (ha!). The public health aspects of soda pop are beginning to make inroads into the public consciousness and the firm is trying to respond with an anti-obesity campaign of its own. Protip: Anytime your signature product inspires you to have to promote a program preventing your product's impact? That's a bad thing (see also: tobacco companies). Still, Coke has done more than just some PR to offset the losses to its soda business. By launching and promoting different drinks such as coffees, teas and various waters and such, the firm is moving to diversify its product line away from just the sugary stuff. It's also been buying up smaller firms that bottle and distribute its products to bring them into the family. The stock has been slightly up over the last year, rising from $34.04 to $37.70 – a gain of about 10.7%. I'd like to see better, but it does offer a 25 cent per share dividend. Still, the firm does have the top two soda pops in Coke and Diet Coke. I'd take a wait-and-see on Coke right now if you're after growth. If you're after growth and income then this could be a good play depending on your other investments.

PepsiCo (NYSE: PEP)

Pepsi is better positioned than Coke for the coming soda pop troubles. The firm makes Pepsi, of course, which trails Coke in soda sales. But it also have a lot of other products, such as Frito-Lay and Quaker Foods, that can backstop it if there's real trouble on the soda front. Even so, CEO Indra Nooyi's plan calls for creating “snackified” drinks from the firm's other products. I know it sounds strange, but at least it's a plan based on leveraging other, existing products. Recall, too, that the firm has lifetime contracts with Taco Bell, KFC, Pizza Hut and Wing Street through those chains being spun off from Pepsi as what is now YUM! Brands in 1997. The firm's stock is up for the year, though not a lot. It does pay a 54 cent dividend; more than double that of Coke. It's well-positioned and is trying to innovate its way to new growth. Nooyi says she hopes to build the firm's healthier alternatives from $10 billion to $30 billion by 2020. That's ambitious but I'm not certain I'd bet against it.

Dr. Pepper Snapple Group (NYSE: DPS)

A perennial third place in the markets and in American thought, Dr. Pepper and Snapple occupy a sort of “of, yeah, them too” space in the soda pop market. Like Coke, DPS focuses heavily on the drink market without a lot of expansion into other consumables. The firm is also responding to obesity concerns, not with a marketing campaign, but with a new line of 10 calorie drinks featuring low-cal versions of Canada Dry Ginger Ale, A&W Root Beer, 7-Up and RC Cola among others. It's yet to be seen how consumers respond to it, but again, the firm is trying to build itself up outside of the weight-increasing sugary drink market. Another positive sign for DPS is its stock price. It's climbed more than 20% in the last year, from $37.67 to $45.30. Of the big three, this is the only one to outperform the S&P 500 over that time frame and that's not to be dismissed lightly. It also pays the highest dividend yield at 3% based on its 34 cent per share dividend.

There are other players in the market, and perhaps I'll deal with them at a later time. But the efforts against the industry are focused on these three firms. How they respond to those efforts against sugary drinks will control how the industry is perceived and treated for the foreseeable future.

Of the three, I'd invest in Dr. Pepper Snapple Group if I had to choose only one. The growth potential there is higher than for the other two. After that, take Pepsi for the firm's already-in-place diversified product line. Otherwise, watch and see how all three react to the pressure that America's growing kick for health places upon them.

Good luck!

Follow Nate on Twitter @natewooley

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Nate Wooley has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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