Despite the looming recession, soft beverages are often considered affordable indulgences or everyday treats for consumers. As a result, the demand for these products tends to remain relatively stable even during economic downturns. While consumers may cut back on discretionary spending in certain areas, they often maintain their consumption of beverages.
Given this backdrop, investors could consider investing in the shares of two renowned beverage companies: The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP). These companies have a strong market presence and are well-positioned to capitalize on the increased demand for beverages this summer.
Thanks to the near-inelastic demand for food and beverages, the industry has shown resilience amid the inflationary environment. The Impact of Inflation on Consumer Behavior report predicts a 5.5% increase in food and beverage dollar sales through all channels for the full year.
In addition, with consumers growing conscious about their physical health and mental well-being, a rising trend in non-alcoholic beverage demand has been observed. Nearly half of the drinkers expressed a desire to decrease their alcohol consumption, while 52% are substituting alcoholic beverages with non-alcoholic alternatives improving.
Moreover, the global soft drinks market is projected to reach $1.5 trillion by 2030, growing at a CAGR of 7.3%. Also, the carbonated soft drinks segment is expected to record a 6.7% CAGR and reach $608 billion during the same period.
Given this backdrop, KO and PEP, with bright prospects, could be wise portfolio additions. To gain a deeper understanding, let's examine the fundamental factors associated with these companies.
The Coca-Cola Company (KO)
KO is one of the most popular beverage companies that manufactures, markets, and sells various non-alcoholic beverages worldwide. The company provides sparkling soft drinks, water, coffee, and tea, juice, value-added dairy, and plant-based beverages, etc., under the brands: Coca-Cola, Diet Coke/Coca-Cola Light, Coca-Cola Zero Sugar, thums up, among others.
On April 26, KO declared a regular quarterly dividend of 46 cents per common share, payable to its shareholders on July 3, 2023. The company’s annual dividend of $1.84 translates to a 3% yield on the prevailing prices, while its four-year average dividend yield is 3.02%.
Its dividend payouts have grown at CAGRs of 3.4% and 3.5% over the past three and five years, respectively. Also, it has a record of 60 years of consecutive dividend growth.
On March 7, vitaminwater®, a soft drink brand under KO, unveiled two new fresh flavors, namely 'with love' and 'forever you,' to its existing zero sugar range. Moreover, the company has implemented an innovative reformulation for all six zero-sugar flavours. The two new delicious additions to the line-up will likely be demanded heavily by its customers across the nation.
KO’s net operating revenues increased 4.7% year-over-year to $10.98 billion in the first quarter (ended March 31, 2023), while its gross profit rose 4.1% from the year-ago value to $6.66 billion. The company’s non-GAAP attributable net income grew 5.2% and 6.3% from the prior-year quarter to $2.94 billion and $0.68 per share, respectively.
Also, its non-GAAP operating income increased 5.6% from the year-ago value to $3.49 billion. During the same period, its total current assets and cash and cash equivalents amounted to $26.88 billion and $12 billion, up 18.9% and 26.1% compared to $22.59 billion and $9.52 billion, respectively, for the period that ended December 31, 2022.
Street expects KO’s revenue and EPS for the second quarter (ending June 30, 2023) to increase 3.5% and 2.6% year-over-year to $11.69 billion and $0.72, respectively. Moreover, it surpassed the EPS and revenue estimates in each of the trailing four quarters, which is promising.
KO’s shares have gained marginally over the past three months to close the last trading session at $60.88.
KO’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Stability and Quality. In the 37-stock A-rated Beverages industry, it is ranked #17. To see additional POWR Ratings of KO for Growth, Value, Momentum, and Sentiment, click here.
PepsiCo, Inc. (PEP)
Prominent beverage company PEP manufactures, markets, distributes, and sells various beverages and convenient foods worldwide. It operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; and Asia Pacific, Australia and New Zealand and China Region.
On May 2, PEP declared a quarterly dividend of $1.265 per share of its common stock, reflecting a 10% year-over-year increase, payable to its shareholders on June 30, 2023. Also, this marks the company's 51st consecutive annual dividend increase.
PEP’s four-year average dividend yield is 2.73%, while its annual dividend of $5.06 translates to a 2.74% yield on the prevailing prices. Its dividend payouts have grown at CAGRs of 6.4% and 7.4% over the past three and five years, respectively.
For the first quarter that ended March 25, 2023, PEP’s net revenue increased 10.2% year-over-year to $17.85 billion, while its gross profit grew 12.4% from the year-ago value to $9.86 billion.
The company’s attributable non-GAAP net income amounted to $2.07 billion and $1.50 per share, representing an increase of 15.4% and 16.3% from the prior-year period, respectively. Also, its non-GAAP operating profit increased 17.1% from the year-ago value to $2.80 billion.
Analysts expect PEP’s revenue and EPS for the second quarter (ending June 30, 2023) to increase 7.3% and 5% year-over-year to $21.70 billion and $1.95, respectively. Additionally, it topped EPS and revenue estimates in each of its trailing four quarters, which is excellent.
Over the past year, the stock has gained 10.2% to close the last trading session at $184.89.
It’s no surprise that PEP has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Growth, Sentiment, and Quality. Out of 37 stocks in the same A-rated industry, it is ranked #10.
In addition to the POWR Ratings we stated above, we also have PEP ratings for Value, Momentum, and Stability. Get all PEP ratings here.
What To Do Next?
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KO shares were trading at $60.50 per share on Thursday afternoon, down $0.38 (-0.62%). Year-to-date, KO has declined -4.16%, versus a 8.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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