Part Three of this series will examine the softer side of the beverage world. Some at the bar may choose to mix their favorite spirit with something soft, or they may not drink at all. Whether it is due to personal convictions or preferences, serving as a designated driver, or just not feeling up to it that day, beverage companies are looking out for these individuals and investors. Some of the largest and most well known soft drink beverage companies in the world reward shareholders with a consistent stream of dividends they can rely on for the future.
The Coca-Cola Company (KO)
Coca-Cola, headquartered in Atlanta GA, manufactures and distributes beverage concentrates and syrups to its various franchised bottlers around the globe. The company is most well known for its flagship brand of Coca-Cola, but also owns several other well known brands, such as Minute Maid, Sprite, Fanta, and Powerade, with a total portfolio of over 500 brands worldwide.
As a company, KO brings in more than $45B in annual revenue, with EPS for 2012 estimated at $1.98. Coca-Cola is expected to be able to grow EPS over the long term by 7.5%. KO is currently carrying enough cash and short term investments to cover all its long term debt, and just last Thursday (September 13), S&P chose to upgrade Coca-Cola's credit rating from A+ to AA-. The Coca-Cola Company has been raising its dividend annually since 1963, and in February, added yet another dividend increase of 9%. The stock, which currently pays out $1.02/share annually, yields 2.64% at its current share price of $38.62.
KO has provided consistent and reliable returns to dividend growth investors, and has been able to increase its dividend annually for 49 years. The company completed a 2-for-1 stock split in August 2012, and appears poised to be able to grow its share price and continue to grow the dividend for years to come. Based on the strength of the global Coca-Cola brand, the company's access to emerging markets, and the history of management providing excellent shareholder value, I would take a close look at KO stock as an investment for the future.
Investors interested in looking at Coca-Cola as an emerging market play should consider:
- Coca-Cola Hellenic (CCH): Coca-Cola's second largest bottling subsidiary, serving much of the Eastern European markets, including Russia.
- Coca-Cola Femsa (KOF): Coca-Cola's largest independent bottler, serving Latin America
PepsiCo is widely considered the No. 2 beverage company in the world, but this description often fails to take into account all that PEP has going for it. PepsiCo describes itself as "…a leading global food, snack, and beverage company." After all, PEP products extend far beyond simply the world of beverages. In fact beverages provide roughly 40% of the company's overall revenue, while food and snacks account for more than 60%. PepsiCo beverage brands include the flagship Pepsi cola, as well as Mountain Dew, Gatorade, Tropicana juice, and many more. In the food and snacks world, PEP has the benefit of brand names like Frito-Lay (Lay's potato chips) and Quaker foods and snacks.
Shares of PEP are currently trading at $70.73, and providing investors with a dividend yielding 3.04% at this time. With EPS for 2012 estimated at $4.06 and a dividend of $2.15, PEP has a current payout ratio of 53% of earnings. PepsiCo has a streak of annual dividend increases that dates back to 1973, with the most recent increase coming in May of 2012 (4%). With the payout ratio of 53%, the dividend is covered by current cash flow with room to continue increasing going forward. EPS growth for the long term is estimated to come in at 3.8% -- well below the industry average of 9.2%. PEP has $20B in long-term debt, and carries cash and short-term investments on the balance sheet of approximately $4.5B.
PepsiCo is an enormous company and generates incredible revenue, but with tepid EPS growth and a large amount of debt on the balance sheet, it appears growth in the future will be slow. Although the dividend is covered by earnings and PEP is likely to maintain the dividend streak going forward, dividend increases will likely be small and mostly superficial. I would look beyond PEP for other investments for my DGI portfolio.
Dr. Pepper Snapple Group (DPS)
In May of 2008, the Cadbury Schweppes Americas Beverage Business was separated from the parent company, (now part of Kraft Foods KFT) to form the Dr. Pepper Snapple Group. Dr. Pepper Snapple manufactures and distributes non-alcoholic beverages across the U.S., Mexico, and Canada. The company focuses on, and has a number of well-recognized brands in areas of non-cola carbonated soft drinks (Dr. Pepper, Canada Dry, and Sunkist) and non-carbonated beverages (Snapple, Hawaiian Punch, and Country Time Lemonade). The company is the third largest North American beverage business (behind KO and PEP), and has multiple brands that are recognized as leaders in their particular beverage segments. With a market cap of $9B, DPS is just a fraction of the size of the big boys in the industry (KO ~$174B and PEP~$110B).
Shares of DPS can be purchased for $44.37 as of this writing, and offer investors an annual dividend of $1.36/share. At current prices, this dividend equates to a yield of 3.06%. Earnings per share for 2012 are estimated at $2.97, which equates to a payout ratio of 34%. Over the next five years, DPS is expected to be able to grow earnings at an above-industry average pace of 13.6%. With cash on the balance sheet valued at $700M, the company is not overly burdened with long-term debt of $2.2B. The company does not have a long history of increasing dividends, as it was only formed in 2008, but has been able to raise dividends for three consecutive years, and is on track for a fourth in 2012.
DPS shares trade with a low 2012 P/E ratio of 15, and a dividend yield just north of 3%. With the low payout ratio of 34% and an above average growth rate projected for years to come, I would consider DPS to be a sound investment opportunity.
All in all, many beverage companies, historically, have provided investors the opportunity for great capital appreciation and dividend growth. Although the famous disclaimer says past performance is no guarantee of future results, the strength of these brands and the commitment of management leads me to believe beverage companies will continue to be a sound investment. The dividends and growth these companies provide offer security to investors during uncertain times, and I'll drink to that.
Disclosure: I am long KOF.