Investors Can Play Defense In The Beverage Industry

Includes: DPS, KO, PEP
by: Greg Group

The market was looking good as stocks had enjoyed a two-week run that brought the S&P up more than 7% on hopes for additional stimulus from the Federal Reserve. Then, the DJIA drops 250 points a day after the Fed meeting. The stocks slide was accelerated by a bearish call from Goldman Sachs, which recommended clients build short positions in the broad S&P 500 index on expectations of more economic weakness. Investors should be concerned about the increasing uncertainty in the stock markets. Now is the time for investors to go into more defensive stocks with low betas and dividend payments. This means consumer staples or products that the population will continue to buy in tough times. One of the best places to be is in beverages. After all, we all need to drink! The non-alcohol beverages have been strong during market pullbacks. Here is a list of beverage stocks to consider.

The Coca-Cola Company (NYSE:KO) has held up strong when the market pulls back. KO is up 8.0% year to date with a dividend yield of 2.7% with dividends growing at 8.5% per year. KO has a beta of 0.51. While Michael Bloomberg and health advocates want to blame soda for obesity in America, KO keeps innovating with new products. KO has moved in the sports drinks, energy drinks, juices and now protein milk. KO has an attractive relative international footprint, particularly in faster-growing emerging markets, and capability to generate strong free cash flow. KO has $13 billion in cash to make acquisitions, increase dividends and buyback shares.

Dr Pepper Snapple Group (NYSE:DPS) seems to have found its groove in 2012. The stock is up 8% year to date and is trading near its 52-week high. DPS has a dividend yield of 3.2% with a dividend increase of 6.25% in the last year. DPS has a beta of 0.48. DPS is seeing consumer strength coming from faster soda sales at on-the-go channels like convenience stores, gas stations and fast-food restaurants. . The company also indicated that initial tests of more 10-calorie sodas are faring well, mirroring those seen in the early days of Dr Pepper Ten. DPS said that the low-calorie versions of 7Up, A&W, Canada Dry, RC Cola and Sunkist will likely see a national launch sometime in 2013. DPS is targeting approximately 20,000 new cold drink placements and 20,000 to 30,000 incremental valves in 2012.

Pepsico Inc (NYSE:PEP) has been hit with foreign exchange rate changes that have decreased its earnings outlook by 5% in 2012. Pepsi reiterated its long-term target of mid-single-digit constant currency net revenue growth and that it is targeting long-term high-single-digit core constant currency EPS growth after a transition year in 2012. The stock is up 3.8% year to date. PEP has a dividend yield of 3.12% with a dividend increase of 3.1% in the last year. Pepsi has a very low beta of 0.32. While carbonated soft drinks (CSD) remain the most popular beverage, PEP recognizes that non-CSD drinks are a faster-growing category. To that end, PEP plans to continue to innovate in that area, following its success with Lipton teas, Aquafina water, Tropicana juices, SoBe, Gatorade and Propel. In 2006, it added Naked Juice and Izze sparkling juices to its portfolio. Another trend the company is focusing on is health and wellness. PEP has eliminated trans fats from many of its snack foods, and is increasingly introducing "good for you" foods under the Quaker Oats brand

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.