Shareholders Take Note As Public Interest Group Sparks Changes By Soda Giants

Includes: KO, PEP
by: Matt Schilling

In recent days, The Center for Science in the Public Interest came out publically and noted a significant finding in both Pepsi Co. and Coca-Cola brands. According to their report, a caramel coloring used by both beverage companies has significant cancer risks, and acts a direct cause of the disease. Michael F. Jacobson, Executive Director for the Center for Science in the Public Interest, stated: "Colorings made with the ammonia or ammonia-sulfate process contain carcinogens and don't belong in the food supply".

Those findings have led to both beverage makers slightly changing the formula of how their premier soda brands are constructed. Pepsi Co. NYSE: PEP and Coca-Cola NYSE: KO have removed the carcinogens, so that they could be compliant with a California State Law that requires beverage makers to label their products with warning labels.

Do the findings by the Center for Science in the Public Interest carry any significant weight? No. However, the position taken by both companies should be commended, and shareholders should praise the role each company has taken.

Will Either KO or PEP incur any downside legal risk moving forward? In terms of legal risk, California State Law was complied with by removing the carcinogen and saving KO and PEP money rather than incurring costs. Both KO and PEP would have incurred costs if they chose to keep the carcinogen in place because all product labels would have had to include a state required warning label detailing that the specific carcinogen and the fact it may cause cancer.

The Food and Drug Administration has also weighed in on the discussion, and it should be noted that "a consumer would have to drink more than 1,000 cans of soda a day to reach the doses administered that have shown links to cancer in rodents".

How Should Investors Play Both KO and PEP on This News? Investors should continue to acquire long positions in both companies. They are both solid conservative growth models, and pay very nice dividends. KO is yielding roughly 3.0% and has increased its dividend every year for at least the last 10 years. PEP yields about 3.3% and has also increased its yield for the last 10 years.

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