Soda has been an American staple for several decades now. Over the last few years, however, the obesity epidemic (rightly or wrongly, depending on who you ask) has brought soda under fire socially. As a result, soda sales are slowing and the earnings of the industry giants are stalling a bit. Does this mean soda companies are no longer worth investing in?
This look into the major players of the industry may provide some answers.
Industry dominance
About 87% of the soda consumed by Americans is produced and sold by three companies.
1). The Coca-Cola Company (NYSE:KO) leads the way with a market share of 37%.
2). PepsiCo, Inc. (NYSE:PEP) is close behind with a market share of 30%.
3). Dr Pepper Snapple Group Inc. (NYSE:DPS) brings up the rear with a market share of 20%.
Brand power across the globe
Source: Yahoo! Finance
The Coca-Cola Company (NYSE:KO) trades at a price-to-earnings ratio of 21.15 times. This valuation is a premium to the industry, as well as the S&P 500 (which trades with a price-to-earnings ratio of 18.1 times). Coca-Cola is known for trading at a premium. It is perhaps the most powerful brand in the world, and it continues to grow its earnings through any economic environment.
The Coca-Cola Company (NYSE:KO) is also a dividend machine–this year marked its 51st straight annual dividend increase. The annual dividend of $1.12 will yield you 2.79% at current prices. The dividend payout ratio is 55%, which indicates room for further dividend growth. The dividend has grown at a rate of 9.8% annually over the last 10 years, giving shareholders inflation-beating growth.
The Coca-Cola Company (NYSE:KO) is truly an international business. It’s sales volumes are spread out almost evenly across the world.
1). North America: 21%
2). Latin America: 29%
3). Europe: 14%
4). Asian Pacific: 18%
5). Eurasia & Africa: 18%
The Coca-Cola Company (NYSE:KO) is earning an 18.25% net profit margin, as well as a 26.68% return on equity. Coke does have a 1.1 total-debt-to-equity ratio, but has increased borrowing in a low interest rate environment. With $2.34 of cash flow per share, Coca-Cola has the ability to keep its debt under control.
Coca-Cola’s 2020 vision is a 10-year plan that the company developed in 2009 to double its system revenues in 10 years. Management is optimistic that things are on course to meet these goals, with annual revenue, volume, and profit goals being met or exceeded.
Driving forward with diversification
Source: Yahoo! Finance
PepsiCo, Inc. (NYSE:PEP) trades at a price-to-earnings ratio of 19.74 times. This is fair value to the sector, and a slight premium over the S&P 500 as a whole. PepsiCo is similar to Coca-Cola in a lot of ways. It sells economically-resilient products through a portfolio full of industry-leading brands.
PepsiCo, Inc. (NYSE:PEP) has a been a great dividend growth stock for a long time. It currently pays a dividend totaling $2.27 a year, which yields 2.70% on current trading prices. This dividend equates to a 51% payout ratio. It has also been consistently growing, with 41 straight annual increases. It has grown 13.6% annually over the last 10 years.
PepsiCo, Inc. (NYSE:PEP) brings in a 30.63% return on equity, with a net profit margin of 10.14%. The company carries a total-debt-to-equity ratio of 1.3 (which a little high), but with $6.00 of cash flow per share it has the cash resources coming in to pay down this debt while maintaining operations growth.
