Return on Shareholder Equity
I believe the return on shareholder equity is one of the best ways to measure a company’s efficiency and improve value for shareholders. The chart above shows shareholder equity across each of the three companies for the past five years. Based on the five year historic figures, I have added a exponential moving average to highlight the changes in equity and predict a rise in equity for a further two years.
| Company | 5-yr ROE |
| KO | 62% |
| PEP | 85% |
| DPS | 15% |
So, despite Coke’s higher net margins, Pepsi has actually grown shareholder equity much faster, due to Pepsi’s larger size. In addition, Pepsi’s shareholder equity is forecast to continue growing at its current rate. Dr Pepper Snapple comes in dead last, which is surprising considering the company’s efficiency and revenue growth.
In the battle for investment, Pepsi was lagging Coke after the company’s poor performance in for margins. However, an investment in Pepsi is beginning to look appealing, as the company has achieved the best return on shareholder equity over the past five years.
On the other hand, Dr Pepper Snapple put in an average performance up to this point, and now the company has fallen into a definitive last place.
That said, all three companies offer dividends and stock buybacks; but which one has returned the most cash to shareholders?
Shareholder cash return
| 5-yr average | |||
| $US Millions | KO | PEP | DPS |
| Dividends Paid | 20,290 | 14,720 | 729 |
| Stock Buyback | 8,659 | 11,760 | 1,990 |
| Total Cash Returned To Shareholders | 28,949 | 26,480 | 2,719 |
| 5-yr total Net Profit | 48,187 | 35,759 | 2,503 |
| % of Net Profit returned to shareholders | 60% | 74% | 109% |
Dr Pepper is the obvious winner here. The company has returned 109% of its net profit to shareholders over the past five years, beating both Coke and Pepsi, who have only returned 60% and 74% of net profit, respectively.
I believe Dr Pepper’s high cash return to shareholders could be the reason for its lagging ROE rate.
Debt
With Coke, Pepsi and Dr Pepper all roughly tied for investment potential there remains one criterion to evaluate them on: debt.
I am using a net debt to EBITDA ratio to put debt into perspective across all three companies. Debt has grown at Pepsi and Coke, whereas Dr Pepper has managed to reduce debt over this five year period from 1 times EBITDA to 0.8 times–yet despite this, Dr Pepper’s debt is still the highest in the group.
In comparison, Coke and Pepsi rapidly increased their debt in 2010, but since then debt levels have remained relatively stagnant despite revenues growing, indicating that net debt has actually risen.
I am going to have to say Dr Pepper wins this category, as the company has reduced debt, unlike its competitors.
Results
| Category | Winner |
| Revenue | PEP |
| The Bottom Line | KO |
| ROE | KO/DPS |
| Shareholder Cash Return | DPS |
| Debt | DPS |
Overall, Pepsi has the largest revenue and Coke has the best profit margins. Coke and Dr Pepper both win the ROE category, as even though Coke is the clear winner, Dr Pepper has returned most of its profit to shareholders and this will affect the ROE growth. As I say, Dr Pepper has returned the most cash to shareholders, and although it does not have the lowest debt in the group it is working hard to bring its net debt down, while both Coke and Pepsi are not.
So, after taking all of that into account, Dr Pepper Snapple looks to me to be the best investment for shareholder returns, judging by recent historic performance.
Data Source: Saxo Capital Markets, Marketwatch
The article Where To Invest: Coke, Pepsi or Dr Pepper? originally appeared on Fool.com and is written by Rupert Hargreaves.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
