Choose This Soft Drink Stock for Its Diversified Products

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

Most investors know the two major players in the soft drink industry:  Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP)Dr. Pepper Snapple Group (NYSE: DPS) is a much smaller rival, with a market capitalization of $9.5 billion, and also offers group of soft drink brands including Dr. Pepper, 7UP, and RC Cola.  Coca-Cola and Pepsi, meanwhile, hold much higher market values of $166 billion and $108 billion, respectively.  Both Coca-Cola and Pepsi have long histories of serving their namesake sodas to millions of consumers, and in turn rewarding shareholders with regularly increasing profits and dividends.  All three pay a solid dividend yield of close to 3 percent.

Over the last several years, Pepsi has made efforts to branch out from its traditional soda business.  Coca-Cola and Dr. Pepper have essentially stood still.  While both Coca-Cola and Dr. Pepper Snapple are profitable companies that should continue making shareholders happy, investors would be wise to favor Pepsi for its diversified product portfolio.

To be sure, Coca-Cola is a juggernaut.  The company carries a market capitalization in excess of $160 billion and has been in existence for well over 100 years.  Coca-Cola sells its beverages all over the world.  At this point, however, it must be noted that for all intents and purposes, Coke is a one-trick pony.  While it’s true that Coca-Cola holds the Dasani and Vitamin Water brands, sugary beverages are still the company’s bread and butter.  Coke’s core sparkling beverage segment, which includes such brands as Coca-Cola and Sprite, represented approximately 75 percent of the company’s worldwide unit case volume for 2011.  Dr. Pepper Snapple is in a similar position, with few offerings outside of its flagship brands. 

Beware the Health-Conscious Consumer 

There is an increasing trend among consumers to switch from high-calorie soft drinks and foods toward healthier options.  As consumers become more health conscious, investors should take note.  In fact, Coca-Cola itself listed this very phenomenon as a major risk to its business in its 2011 annual report, saying “Increasing concern among consumers, public health professionals and government agencies of the potential health problems associated with obesity and inactive lifestyles represents a significant challenge to our industry”. 

Pepsi is to a certain degree in the same predicament as Coca-Cola, in that soft drinks make up a considerable portion of its sales.  However, Pepsi has taken measurable initiatives to protect itself against consumers’ shunning sugary soft drinks by broadening its product portfolio.  To that end, at the end of 2011, beverages made up 52 percent of the Pepsi’s sales, with food comprising the remaining 48 percent. 

Pepsi has a long list of brands that appeal to consumers.  The company offers products for those who want healthier alternatives, including Quaker Oats and Baked Lays potato chips.  Pepsi is much more than just a soda company.  In total, Pepsi has 22 brands that each brings in at least $1 billion in annual sales.  That number of billion-dollar brands is double what it was in 2000.  Plainly stated, Pepsi isn’t nearly as vulnerable as Coca-Cola should the consumer shy away from sugary soft drinks. 

A Vision for the Future

It’s true that these initiatives have resulted in higher costs for Pepsi, and consequently restrained profit growth.  But the company believes these measures will ensure the long-term viability of the business, and I tend to agree.  In the company’s 2011 report, CEO Indra Nooyi openly acknowledged that the consumer was changing, and she articulated her vision to get ahead of the trend.  All things considered, I would rather invest in a company and take some short-term struggles in exchange for a more certain future.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends PepsiCo and The Coca-Cola Company. 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!

blog comments powered by Disqus