Will The Coca-Cola Company (KO) Lose Investors’ Love?

One of the main reasons for owning stocks like The Coca-Cola Company (NYSE:KO) is the company’s dividend. In a world of the low interest rates, investors constantly search for safe companies which can provide a decent income stream. Stock appreciation is also a source of income, and is an important one. Coca-Cola has been underperforming this year, up a mere 14%. The company’s recent earnings report came in-line with analysts’ estimates and impressed few investors, some of whom dumped the stock on the news. As the market and valuations continue to rise, is Coca-Cola still a safe bet?

Blaming the weather

The Coca-Cola Company (NYSE:KO)’s revenue numbers came in softer than expected. The company blamed a challenging global macroeconomic environment and unusually poor weather conditions in the quarter for this. In North America, sparkling beverages sales volume dropped 4% due to the weather. Those are external factors, and are likely to worry PepsiCo, Inc. (NYSE:PEP) and Dr Pepper Snapple Group Inc. (NYSE:DPS) investors as well since those companies have yet to report their results. Pepsico shares showed strength on the news, however. The company earns 50.7% of its revenue from snacks, which are less weather sensitive.

While the bad weather is less likely to continue, the macroeconomic environment is here to stay. Europe is still a major headache. European sales volume fell 4% in the quarter. Consumers in Europe are cautious, given the employment situation and the lack of economic growth in the region. Companies from different industries state that there are no signs of improvement on the European front. Latin America also suffered due to the slower growth rate of personal consumption across the region.

Growth perspectives

Eurasia & Africa was a strong point for The Coca-Cola Company (NYSE:KO), scoring a 9% growth. This looks good, though more volume-heavy regions must improve to significantly influence the bottom line. In the developed world, consumers are getting increasingly focused on pricing. Dr Pepper Snapple Group Inc. (NYSE:DPS), which earns 94% of its revenue from North America, might be the main loser from this trend. The company’s stock dynamics confirm this assumption since Dr Pepper Snapple is up only 10% this year.

Another growth hurdle that comes with beverages is obesity awareness. Calorie-heavy drinks are likely to be more pressured as consumers and governments become more concerned about health issues. New federal rules that regulate the amount of fat, salt and sugar in snacks sold in U.S. schools may be just the beginning of the new trend.

Valuation

Interest rates have been rising recently. As a huge number of investors buy stocks like Cola-Cola and PepsiCo, Inc. (NYSE:PEP) for their dividends and push prices higher, it is important to judge whether the same investors will abandon the stocks in the new environment.

A 10-year Treasury bond currently yields 2.52%. The Coca-Cola Company (NYSE:KO) pays a dividend that yields 2.74%. PepsiCo, Inc. (NYSE:PEP), which has had a nice run this year and is up 29%, yields 2.62%. Dr Pepper Snapple Group Inc. (NYSE:DPS) yields 3.17%. In this environment, the focus would begin to shift from yields to stock performance and growth perspectives.

The Coca-Cola Company (NYSE:KO) trades at 17.7 times its forward price-to-earnings ratio while PepsiCo, Inc. (NYSE:PEP) trades at 18.2 times its forward price-to-earnings ratio. Dr Pepper Snapple Group Inc. (NYSE:DPS) is the cheapest stock based on this metric, trading at 14.42 times its forward price-to-earnings ratio. Given the fact that investors can’t expect explosive growth on the beverage front, the valuations look a little elevated. Analysts are cautiously optimistic about shares’ perspectives. Their mean target prices give Cola-Cola a 13% upside while giving a 3% upside to both Pepsico and Dr Pepper Snapple.

Bottom line

The weather might be good or bad, but the macroeconomic environment is here to stay for at least a while. The Coca-Cola Company (NYSE:KO)must extract more from volume-heavy markets if it wants to continue its growth. PepsiCo, Inc. (NYSE:PEP) has had a good run, and investors should look for an earnings beat in the company’s upcoming report. Dr Pepper Snapple Group Inc. (NYSE:DPS) does not have the emerging market exposure that Pepsico and Coca-Cola have, and this limits its growth potential. It’s no wonder that its shares trade at a discount compared to the other two companies’ stocks.

If interest rates continue to rise, this could put additional pressure on stocks that are considered dividend plays. Institutional investors would like to demand more premium from the risks that arise when investing in stocks. If the companies cannot increase their dividends, there is only one way that this premium yield could become a reality. A drop in stock prices would push the yield.

The article Will Coca-Cola Lose Investors’ Love? originally appeared on Fool.com.

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