Wednesday, February 19, 2014

Beverage Battleground, Coke vs Pepsi vs Doctor Pepper

The Players

Every dividend growth investor is well aware of Coca Cola (KO) and many also track the slightly less popular PepsiCo (PEP).  These two carbonated drink behemoths have been steadily providing juicy dividend growth to investors for years.  While these two brothers battle it out for supremacy of the beverage industry what about their lesser known brother, the often forgotten yet still distinguished Dr. Pepper (DPS) and his sidekick Snapple.

The Champion

Coca Cola was born in the 19th century, created by Pharmacist and Colonel, John Pemberton.  Originally designed as an alternative to the addictive opiate Morphine, Coca Cola was marketed to cure a great number of different ailments.  While not quite the miraculous potion it was touted to be, it managed to cure more than one shareholder of an empty wallet.  From its humble beginnings Coca Cola has been able to propel itself to the head of the beverage industry currently sitting at a market cap of 163.31 billion dollars.

The Contender

PepsiCo also found its beginnings in the late 19th century, created by Pharmacist Caleb Bradham.  While this underachiever did not rise up through the ranks of the military he did create an extremely successful beverage which eventually grew into a beverage and snack company hybrid that currently sits at a market cap of 118.24 billion dollars.  In 2005 PepsiCo managed to briefly dethrone the champ after 112 years of constant battle, eventually losing the throne back to Coca Cola.  Currently the main sources of beverage revenue for PepsiCo is attributed to brands Gatoraid and Tropicana not the original fizzy drink of fame that brought the company its original fortune.

The Challenger

Not to be forgotten, the third leg of the beverage tripod goes by the name of Dr. Pepper.  Dr. Pepper actually preceded Coca Cola by one year with its "Hello World" introduction in 1885.  The good doctor was created by Pharmacist Charles Alderton who shortly after birthing the famed beverage sold the recipe to his business partner to focus on his medical career.  While not as impressive as the other two titans of the industry, Dr. Pepper should not be counted out as it has grown to a noteworthy market cap of 10.09 billion dollars.

Summary Statistics

Values Current as of 19 Feb 2014

From the data presented we can see that both Coca Cola and PepsiCo are considered dividend champions having achieved consistent dividend growth over vast periods of time.  Dr. Pepper initiated its dividend in 2009 and has been a solid grower every year since then. 

 All three companies have a very similar dividend yield, with Dr. Pepper edging out the others at 3.22%  

PepsiCo has the greatest earnings per share and also maintains an extremely aggressive share buyback program which it initiated in March of 2013, pledging to buy 10 billion dollars worth of shares back over a 3 year period.  Both Dr. Pepper and Coca Cola maintain much smaller share buyback programs.  

The P/E ratios of all three companies are very similar with Dr. Pepper taking the edge at 16.66.

As a dividend growth investor, lower (compared to historical value) share prices are not always a bad thing since we tend to buy and hold stocks for very long periods of time to collect the dividend.  As long as the environment of the company has not changed significantly, buying at market lows allows us to reduce our cost basis and increase our yield on cost for a position.  Both Coca Cola and Pepsi had lackluster 4th quarters for 2013.  As such their share prices have suffered in the last few weeks creating interesting buy opportunities.  Coca Cola in particular is currently trading near its 52 week low.  Dr. Pepper reported excellent earnings for this same quarter with share prices reaching historical highs.  

All three companies have a majority of institutional ownership.  Dr. Pepper leads the pack with a whopping 96%.  On one hand this shows that the directors, officers and employees of Dr. Pepper have a high level of confidence in their product.  On the other hand, a major sell off by institutional owners (who often have massive positions within the company) could saturate the market quickly when supply overshadows demand.

The Intangibles 

Russell Wilson didn't recently lead the Seattle Seahawks to Superbowl victory because he is the most genetically superior or experienced athlete on the field. Russell has a characteristic that is difficult to quantify, a fire that burns in his heart so strongly that there was simply no way he could accept failure.  Each of these companies also has an intangible, a characteristic or unique property that sets them apart.  

Coca Cola has charged into the foreign market.  Greatly expanding operations in China and India that could provide the company with billions of new customers.  With billions of dollars invested Coke recently opened its forty-third bottling company in China.  In 2013 Coca Cola managed a sales volume increase of 1% total with 8% and 5% increases in India and China respectively.  Coca Cola also recently acquired K-Cup maker Green Mountain Coffee which could provide an interesting growth opportunity as the companies work together to launch a soft drink portfolio to challenge Sodastream's do-it-yourself soda market.  

When most people think of PepsiCo they immediately think of the sugary beverage that is the namesake of the company.  They often fail to realize that PepsiCo has a much deeper pool of products that are driving its earnings and growth potential.  PepsiCo is the global leader in the savory snack category with a massive assortment of snacks ranging from Life Cereal to Sun Chips.  PepsiCo also has a 10 billion dollar "Good-for-You" product line which includes companies like Naked Juice, Quaker Oats and Aquafina.  With the combined potential of their beverage and snack branches PepsiCo is capable of dominating multiple industries at the same time.  

Dr. Pepper is finally taking steps to join Coca Cola and PepsiCo on the pedestal.  They have recently worked their way into the energy drink industry with the "Venom" line of beverages.  While I'm not sure that drinking Venom is good for you, this product could allow Dr. Pepper to take a healthy bite out of the energy drink market.   They are also making a huge move by expanding on their newer bottling services.  Dr. Pepper has historically outsourced this integral part of their operation to Pepsi (30%), Coke (30%) and other outside services (40%).  One major setback faced by Dr. Pepper is the fact that they do not own rights to their own product outside of North America.  Currently Dr. Pepper products outside of this region are owned by both Coca Cola and Pepsi who purchased the trademark from Dr. Pepper because they have greater capability to distribute the product worldwide.  


These are three dividend growers whose seeds were planted at the same time, in the same soil, but grew into completely different products.  Coca Cola may wear the crown currently, but Pepsi with its retinue of snacks still poses a constant threat.  While Coke and Pepsi turn to foreign lands and new industries for growth, Dr. Pepper has found room to expand and grow at home by increasing its infrastructure.  All three companies offer an interesting opportunity for dividend growth investors and should not be overlooked.   

What is your favorite soft drink company moving forward and why? 

  (I am currently long KO)



  1. Hi Dividendasaur,

    Thanks for this very detailed analysis. Very interesting. I like KO for its potential of international growth. But I also like PEP for its snack diversification and "healthy drinks". Both of them are on my watchlist and I intend to buy some shares in the next few months.

    Keep up the good job

  2. Thanks Guillaume,

    If Coke manages to stay at these prices I will be hard pressed not to pick up more next month when I make my dividend purchase. The recent dividend increase today by KO is just the cherry on top.

    Take care!

  3. The yields are much more comparable now after the increases and pullbacks in share price of KO and PEP. I think PEP has the edge right now. Well unless DPS announced an increase as well. I can't remember their normal schedule. I've got a pretty detailed analysis of KO and PEP on SA this past week and DPS is the next one up. Hopefully early next week. I really like KO and PEP and they're going to be great in the long run. It's funny when I was a kid and had no idea about running a business or investing I always wondered why KO or PEP never bought DPS.

  4. JC, I really enjoyed your articles




    Keep up the good work, and I look forward to the DPS article. I was surprised to find out that KO and PEP owned rights to DPS abroad. I am not sure when DPS regains its foreign ownership but I wonder if it will provide extra growth should they ever decide to expand out of the US.

    1. I'm pretty sure the original agreements were for 10 years. So it could be a bit longer until DPS could regain those rights. I'd expect DPS to try and re-up for at least one more round of agreements with both, although maybe for 5 years rather than 10 years.

      I'm glad you liked the KO and PEP articles and the DPS article is almost done. I'm hoping for it to go through the editorial process at SA tonight and post sometime tomorrow.