The Coca-Cola Company (KO), PepsiCo, Inc. (PEP), Dr Pepper Snapple Group Inc. (DPS): Is Warren Buffett Wrong?

In addition to diversifying their product mixes, soft-drink companies should also ramp up investment in emerging markets. According to The Coca-Cola Company (NYSE:KO), worldwide per- capita consumption of its beverages was less than one-fourth of its U.S. consumption, suggesting that there is still a long runway for growth in foreign countries.

But diversifying into other businesses and focusing on foreign expansion will only take soft-drink companies so far. The real solution is for the industry to develop an innovative sweetener that does not have the poor reputation of ingredients like high-fructose corn syrup and aspartame. Only then will the pressure from health groups and discerning consumers subside.

What investors should make of it

Warren Buffett likes The Coca-Cola Company (NYSE:KO) because it is an unparalleled consumer brand with strong customer loyalty. It is the kind of company that will continue to create value for shareholders for decades into the future. But that does not mean it is a great company for you to own.

Buffett’s investable assets are so large that he has to settle for slower-growing companies that offer decent returns. Chances are, you do not have the same constraints.

Investors should expect slower growth from all major soft-drink companies in the years ahead. The headwinds in the U.S. will not impair the companies’ ability to grow sales worldwide, but declining volumes in a huge market will be a permanent drag on top-line growth.

Look for Coca-Cola to either (1) diversify its operations; (2) experience strong volume growth in foreign nations; or (3) come up with an innovative (and healthy) sweetener before joining Buffett in the stock.

PepsiCo is in a better position than Coca-Cola and Dr. Pepper Snapple because it has already diversified into the salty snacks market. It also offers a strong dividend. Dividend stocks can make you rich. It’s as simple as that. While they don’t garner the notoriety of high-flying growth stocks, they’re also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine.

The article Is Warren Buffett Wrong About Coca-Cola? originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 

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