When I talk to my investing friends, most of whom are 30-something professionals, we like to swap our latest picks. Invariably, most of what I hear about is the latest speculative names, such as how an investment in HEMP, INC. (PINK:HEMP) is going to put my grandkids through college . Even the more “conservative” of the bunch will say things like “Google Inc (NASDAQ:GOOG) is going to $1000 this year! I’m putting half of my savings in it!”
While this may very well be the case, Google could just as easily fall back to $600 a share after a mediocre earnings report. Hemp, Inc could make its investors rich, but I give that a 5% chance of happening–and that is being generous. Nobody should be willing to lose 25% or more of their long-term savings, no matter how good the potential rewards may be.
When I tell my friends to put a substantial chunk of their savings in an established giant dividend-payer like The Coca-Cola Company (NYSE:KO), they laugh and tell me about my “boring” portfolio. While I agree that it is fine to speculate a bit with some of your discretionary cash (I certainly do), Coca-Cola is the perfect example of a stock that you should hold for the long term. And 9 times out of 10, these “boring” stocks outperform their exciting counterparts over the long term.
About Coca-Cola
As most people already know, The Coca-Cola Company (NYSE:KO) is the world’s largest soft drink company, with sales of almost $50 billion per year. Their products are now sold in more than 200 countries, and they own (or license) over 500 brands. Despite this last fact, I believe there is still room for Coca-Cola to grow, particularly internationally, since over 44% of the company’s revenue still comes from North America. Compare that with the 11.7% of revenues that come from Asia, despite their massive population, and it’s easy to see potential here.
Over the long term, few stocks have had the consistent performance of Coca-Cola. They excel at two areas that long term investors love: dividends and buybacks. As far as buybacks go, over the past two years alone the company has reduced the amount of outstanding shares from 4.67 billion to 4.48 billion, a 4.1% reduction. The Coca-Cola Company (NYSE:KO) also pays a nice dividend of almost 3% currently, and it has raised the amount of the dividend every year in recent history.
With its record of stability and returns, it is no wonder that Coca-Cola trades at a premium to many other companies. Currently trading for 20 times TTM earnings, analysts are projecting an average annual earnings growth rate of 9% going forward. Again, this multiple seems a bit high; however, this kind of rock-solid investment is hard to come by these days, so investors are willing to pay a premium for it.
The Alternatives
The next largest competitor is PepsiCo, Inc. (NYSE:PEP), and another significant soft-drink competitor is Dr Pepper Snapple Group Inc. (NYSE:DPS).
PepsiCo, while a smaller company, is significantly more diversified than The Coca-Cola Company (NYSE:KO), which may sway some investors. In addition to their well-known beverage business, the company also has a thriving food business that includes brands such as Fritos, Doritos, Lay’s, Sun Chips, Quaker, Cap’n Crunch, and Rice-A-Roni, among others.
As far as valuation goes, Pepsi trades at an almost identical P/E ratio (19.7) and offers almost the same dividend yield (2.8%), so for most investors it is a simple matter of preference. Both are very solid investments, I just happen to prefer the stability and historical performance of Coca-Cola.
The Coca-Cola Company (NYSE:KO) and PepsiCo dominate the market. To give you an idea of the extent of this dominance, the number three non-alcoholic beverage company in the U.S., Dr. Pepper Snapple Group (DPS), is less than 9% of the size of Pepsi, the smaller of the two leaders.
Despite its smaller size, Dr. Pepper has an extensive and well-known product line that includes such brands as Dr. Pepper, 7UP, A&W, Snapple, Hawaiian Punch, Fiji water, and Arizona tea, which is growing rapidly in popularity with their signature big cans in many flavors. Of the three companies, Dr. Pepper may have the most room for growth, with all of its business coming from North America, and no international presence as of yet. Dr. Pepper is a more risky, less-established company, although is still more stable than most stocks. If you have the inclination to kick your risk level up a notch, Dr. Pepper is worth a look. It also pays a nice 3.5% dividend yield, making it particularly attractive to income investors.
The Bottom Line
Between Coca-Cola and PepsiCo, there is no clear winner. Again, it is a matter of investor preference. PepsiCo has a more diverse array of products, and arguably more room to grow. Coca-Cola has the stability and respect of being number one, and is extremely solid while still having growth potential. Whichever you choose, Coke or Pepsi, it should provide sweet returns for generations to come!
The article This Beverage Company Is A Perfect Example Of A Solid Long-Term Investment originally appeared on Fool.com and is written by Matthew Frankel.
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