Sweet Dividend Yields Found in the Beverage Industry

by: Dividend Monk

The non-alcoholic beverage industry is a competitive arena dominated by two main players, and there are some solid dividends to be found. This glance showcases four dividend payers and two non-dividend payers for comparison purposes.

Coca Cola (NYSE:KO)
With popular brands such as Coca Cola, Sprite, Minute Maid, and Powerade, the Coca Cola Company is the largest non-alcoholic beverage company in the world, and has one of the strongest brands in existence. Their brand strength, combined with their vast international exposure, gives the company a large economic moat. The balance sheet is very strong, with a low debt/equity ratio of only 0.16. Goodwill on their balance sheet only makes up a small part of shareholder equity, and their interest coverage ratio is in the upper 20's.

Unfortunately, all of these upsides come with a premium stock price. Coca Cola stock was monstrously overvalued several years ago, and although the price still isn't particularly low, it is at least reasonable given their strong economic position. One isn't likely to vastly outperform the market with Coke stock, but it could make for a great long-term defensive holding that grows its dividends year after year. Dwindling public interest in carbonated beverages is offset by their international market exposure, and the company also owns several juice brands and other healthier drinks. Based on this year's stock price run-up, it might be prudent to look for stock price dips.

Price to Earnings: 19.5
Dividend Yield: 2.78%
5-Year EPS Growth: 10%
5-Year Dividend Growth: 9.5%
LT Debt/Equity: 0.16

Pepsico (NYSE:PEP)
Pepsico is number two in beverages, with products like Pepsi, Tropicana, and Gatorade, but is also diversified into snack foods. While Coca Cola sticks specifically to beverages, Pepsico also owns food brands such as Lays chips and Quaker oats. This has the side effect of reducing Pepsico's profit margin, since beverages carry a higher margin than snacks. Pepsico has a profit margin of around 13% compared to Coca Cola's profit margin of 24%. Pepsico, however, has been experiencing slightly higher growth, and over the last several years has been taking the initiative that Coca Cola has been following in several instances. Pepsico bought one of its bottlers, and then Coca Cola bought one of its bottlers. Pepsico started focusing on including healthier brands before Coca Cola. Meanwhile, Pepsico's stock valuation is the lower of the two.

Pepsico had balance sheet strength near that of Coca Cola until 2010 when Pepsico took on more debt. The LT Debt/Equity is now 0.93 and the interest coverage ratio is approximately 10. Goodwill is equal to nearly three-quarters of Pepsico's total shareholder equity. It's not a bad balance sheet by any stretch, but worth comparing to Coca Cola for stock valuation purposes.

Price to Earnings: 16.6
Dividend Yield: 2.91%
5-Year EPS Growth: 10.5%
5-Year Dividend Growth: 13%
LT Debt/Equity: 0.93

Dr. Pepper Snapple Group (NYSE:DPS)
The Dr. Pepper Snapple Group was spun off from Cadbury Schweppes in 2008, and therefore doesn't provide investors with as much historical information regarding dividends and growth as companies like KO and PEP. The company offers a diversified line-up of beverage brands such as Dr. Pepper, Snapple, Mott's, Hawaiian Punch, and A&W Root Beer.

Even with a substantial market capitalization of $8 billion, the company is still significantly smaller than both Pepsico or Coca Cola, and they don't have the kind of international exposure or distribution networks that those two giants have. The company's balance sheet is reasonable, yet far behind that of Coca Cola and slightly behind that of Pepsico, with a LT Debt/Equity ratio of 0.99 and an interest coverage ratio of less than 10. DPS may make for an interesting value pick, but for those desiring more peace of mind and less portfolio maintenance, Coca Cola or Pepsico are probably the better choices.

Price to Earnings: 16.6
Dividend Yield: 2.83%
5-Year EPS Growth: N/A
5-Year Dividend Growth: N/A
LT Debt/Equity: 0.99

Hansen Natural (HANS)
Hansen Natural is not a dividend payer, but is included in this industry glance for completeness and comparison. The company holds the strong brand of Monster energy drinks, and offers a line up of natural sodas, juices, and teas. The theme of their products is that they use more natural ingredients.

The company has a flawless balance sheet (zero long-term debt) and decent growth prospects, but its market capitalization of less than $5 billion makes it a riskier investment than some of the larger companies. Hansen's net margin is lower than that of Coca Cola. The five-year EPS growth in comparison to the current P/E shows that the company has a PEG ratio of under 1, but growth is likely to slow down (as it has in 2010). With its strong balance sheet and growth potential, this one is best left for growth investors and passed by those seeking a dividend.

Price to Earnings: 23.3
Dividend Yield: N/A
5-Year EPS Growth: 29%
5-Year Dividend Growth: N/A
LT Debt/Equity: 0

National Beverage Corporation (NASDAQ:FIZZ)
National Beverage Corporation, with a market capitalization of less than $1 billion, offers a variety of value beverage brands such as Shasta and Faygo. Due to their cheaper pricing, the company has a much smaller net profit margin than the larger companies, at less than 6%. Revenue growth has been steady but slow, and most of the EPS growth has come from improving margins, which can only last for so long until it must slow down. The company has paid irregular but large special dividends. The balance sheet is very strong with zero debt and little goodwill. Free cash flow has generally exceeded net income over the last several years.

The company paid a $1.35 dividend in January 2010, amounting to a dividend yield in the ballpark of 10%. The company has declared a $2.30 dividend to be paid in February 2011, which amounts to a dividend yield of over 16%. The dividend history has shown that they have paid some pretty substantial dividends, but not every year, and there was a large dividend gap between 1996 and 2004. This company might be worth a more thorough look for those interested in smallcaps despite not being a regular dividend payer.

Price to Earnings: 16.8
Dividend Yield: varies
5-Year EPS Growth: 14%
5-Year Dividend Growth: varies
LT Debt/Equity: 0

Cott Corporation (NYSE:COT)
Cott Corporation sells a variety of carbonated beverages, juices, energy drinks, and teas. The company, like Hansen, does not pay dividends. Company stock was drastically overvalued several years ago and earnings have been highly erratic over this period. Five-year EPS growth isn't a worthwhile number due to the irregularity.

LT Debt/Equity is 1.19 and the interest coverage ratio is only around 3. The valuation is pretty low, but seems deserved due to the lack of an economic moat and unappealing balance sheet. An obvious pass for dividend investors.

Price to Earnings: 12.0
Dividend Yield: N/A
5-Year EPS Growth: N/A
5-Year Dividend Growth: N/A
LT Debt/Equity: 1.19

Yield Chart

click to enlarge

The above chart uses year-end stock prices for yield calculation on an annual basis. KO and PEP have paid an increasing number of regular dividends, with the yield of PEP gradually catching up to KO and surpassing it. DPS paid a dividend in the fourth quarter of 2009, and then paid four quarterly dividends in 2010. The dividends in the chart for FIZZ are based on the declare date.

Comparison Table
As shown, this industry offers the two blue-chip choices of Coca Cola and Pepsico to give investors regular, growing, and defensive dividend income. Their yields certainly aren't the largest around, but there is substantial dividend growth. Dr. Pepper Snapple is worth keeping an eye on, and National Beverage Corporation is an interesting shareholder-friendly smallcap that might deserve a deeper look.

Company P/E Div Yield 5-Yr EPS Growth 5-Yr Div Growth LT Debt/Equity
Coca Cola 19.5 2.78% 10% 9.5% 0.16
Pepsico 16.6 2.91% 10.5% 13% 0.93
Dr. Pepper Snapple 16.6 2.83 N/A N/A 0.99
Hansen Natural 23.3 N/A 29% N/A 0
National Beverage Corp 16.8 varies 14% varies 0
COTT Corporation 12.0 N/A N/A N/A 1.19

Disclosure: I am long KO.