Recently, concerns of investors have continued to mount over the future of Coca-Cola (KO) and other soda makers like PepsiCo (PEP) in the wake of increased obesity epidemic in the U.S., Mexico and many other developed countries across the globe that usually contribute a huge part of Coca-Cola's yearly revenue. Really, it isn't without some good reasons that Coca-Cola has been the favorite of many discerning investors over many decades, like Warren Buffett's Berkshire Hathaway (BRK.A) with a 400 million share stake in Coca-Cola. Coca-Cola has established itself as a strong financial performer in all major indices. The stock has consistently earned huge revenues and maintained solid earnings per share for several decades. Some other benefits that have caused many individual and institutional investors to love Coca-Cola's stock include consistent growth in dividend increases, good free cash flow and its solid share buyback policy.
Some recent reports like the one here and here indicate that soda consumption in the U.S. has fallen drastically in the last few years. While the first report indicates that soda consumption in the U.S. fell for the eighth consecutive year, the latter shows that the sales of diet carbonated soft drinks have also plummeted 6.9% year over year (YoY) which is even more intriguing. The first report says that people have been opting for energy drinks and bottled water whenever there was the need to quench their thirst. The question is, do these reports indicate that tough times await Coca-Cola and other major soda manufacturers in the long run? How much of concern should we have about these reports?
The New Approach by the Major Soda Makers to Gain Relevance and Boost Sales
Coca-Cola and PepsiCo, which are the two companies mostly hit by a decline in sales, have started brainstorming on how to boost consumption and their sales. Coca-Cola and PepsiCo have turned to celebrities to harness their charming prowess to influence improved consumption and sales. While Coca-Cola recently signed a deal with fashion designer Marc Jacobs to boost the sales of its Diet Coke, PepsiCo on its part has recently contracted singer Beyonce in a deal worth $50 million to use the power of celebrity to improve the sales of the company. In addition, PepsiCo has just introduced its first new bottle redesign in the last 17 years. On another note, Coca-Cola is working to integrate stevia, which is the all-natural zero calorie sweetener, into its carbonated drinks. Really, I believe that in the next few years, more strategies will be adopted to improve sales and regain consumer confidence in their carbonated drinks. After all, they have the financial muscle to influence things in their favor.
An Overview of the Major Soda Makers
Coca-Cola, PepsiCo and Dr. Pepper Snapple (DPS) are the three major soda makers making great waves in the soft drink market. However, of the three companies, Coca-Cola maintains the largest market share globally. The company takes the lead in the U.S, with 41.9% market dominance, followed by PepsiCo, with 28.5% market share. Dr. Pepper Snapple keeps a distant third position with 16.7% market dominance level. However, in terms of stock performance in the last five years, Dr. Pepper Snapple takes the lead with a 95% gain in share price to investors. Coca-Cola trails with an 80% price gain, while PepsiCo lags behind them with 38% price gain to investors during the same time frame. The Coca-Cola stock maintains a price earnings ratio similar to PepsiCo, but the stock trades at a premium of 6% when compared with PepsiCo and Dr. Pepper Snapple, which are its two main competitors in the market. On the scale of dividend yield, Coca-Cola offers investors a dividend yield of 3% compared to 2.85% for PepsiCo and 3.45% for Dr. Pepper Snapple.
Coca-Cola is currently making serious improvement to its products in its bid to stay on top in the face of several concerns about carbonated drinks. The company has a lot of positive attributes that could continue to work in its favor towards the foreseeable future. So, despite the recent concerns, investing in Coca-Cola stock could still continue to be a great economic moat, because the company has the underlying financial strength to change with the times. In my view, it's a BUY.