The Coca-Cola Company (KO), PepsiCo, Inc. (PEP), Dr Pepper Snapple Group Inc. (DPS): Is Soda Bad for Your Portfolio?

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Soda stocks may be consumer staple defensives but they’re on the defensive thanks to a constant clamor of “soda is bad for you” headlines. Investing in them requires you to know just what they’re up against. Can they profit despite declining soda consumption trends? Some troubling questions follow.

Can soda make children more aggressive?

Are diet sodas worse for dieters than sugar sodas?

Do soda drinkers have a higher risk of stroke?

Can drinking diet soda increase the risk of diabetes?

The answers, according to scientific studies, are all yes.

A study showed five year olds were more prone to aggression  the more soda they consumed.

A decade long study proved diet soda drinkers were 65% more likely to  be overweight in seven to eight years.

Adults drinking one or more sodas daily had a16% higher risk of stroke .

One diet soda weekly can increase risk of diabetes by 33%.

The downtrend
This is all very unfortunate news for soda drinkers and investors in the Big Three soda stocks, The Coca-Cola Company (NYSE:KO)PepsiCo, Inc. (NYSE:PEP)Dr Pepper Snapple Group Inc. (NYSE:DPS).

Although the US is the largest consumer of soda, there has been a concerning downtrend in consumption as a new generation eschews pop. Pediatricians are making it a standard question at well child visits, “Does your child consume sodas?”, and if the answer is yes advising parents to cut it down or out entirely.

The Coca-Cola Company (NYSE:KO)Flat to down sparkling (as the companies call soda or CSDs) sales have been noted on many quarterly earnings calls. Dr Pepper Snapple Group Inc. (NYSE:DPS) CEO Larry Young summed it up best on the second quarter earnings release,” Changing consumer behavior takes time, and we remain committed to giving consumers a reason to come back to the CSD category.” Diet soda sales have seen even worse declines as detailed by Fellow Fool Brian Stoffel.

There has been good reason to hold these. The Coca-Cola Company (NYSE:KO) has been a long term hold for Warren Buffett with three year gains of 57.3%. PepsiCo, Inc. (NYSE:PEP) has given investors 46.82% share price appreciation over three years but Dr Pepper Snapple Group Inc. (NYSE:DPS) has outpaced these other two with 73% gains. As seen on the chart dividend growth has rewarded shareholders as well.

 Beside the headline noise there is some good news.

KO Total Return Price data by YCharts

Multiple choices
The good news is these companies have been expanding non-soda choices. Dr. Pepper Snapple offers 70 different choices of Snapple’s non-carbonated refreshment. It also offers Mott’s juices, Clamato, alcoholic beverage mixers, lemonades, and ready-to-drink teas for over 50 brands. The company recently introduced its TEN platform, diet versions of their core soda brands that so far is trending well.

The Coca-Cola Company (NYSE:KO) has been experimenting with stevia as an alternative to artificial sweetener aspartame which has come under fire. The company went on the defensive with a print ad campaign to reassure consumers of the ingredient’s safety. The Coca-Cola Company (NYSE:KO) been expanding its brand portfolio as well with lines of functional waters, energy drinks, teas, a new herbal drink, and fruit juices. You might be surprised to learn The Coca-Cola Company (NYSE:KO) has 28% share of the US market for not-from-concentrate OJ. PepsiCo, Inc. (NYSE:PEP) holds 40% share of that same OJ market.

PepsiCo, Inc. (NYSE:PEP) has been no slouch with an ever-growing line of non-carbonated beverages and food brands, not just Frito-Lay snacks and Quaker products but cereals and side dishes, too.

Choice multiples
The market values Dr Pepper Snapple Group Inc. (NYSE:DPS)’s forward earnings at 13.78, the lowest of the Big Three soda companies. However the stock is down 1.32% for the last year and short interest is the highest at 4.70% and increasing.

Analysts predict 7.53% five year EPS growth year-over-year. That number may be too low with the new line of diet sodas and promotional activities. Last year they initiated a wildly successful Facebook Credits promotion which it is continuing this year in which consumers redeemed cap codes for Facebook credits.They have also been reaching out to Hispanics with nationwide community events.

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