Which is the Better Beverage Stock? Coca-Cola (KO) vs. Keurig Dr. Pepper (KDP)
According to Research and Markets, the global beverage market is expected to reach $1.85 trillion, growing at a CAGR of 3.10% between 2019 and 2024. This growth is projected to be fueled by the increasing consumption of drinks per capita globally in major developing regions fueled in part by higher disposable income, and changes in consumer preferences towards beverages.
The food and beverage industry, which is represented by the Invesco Dynamic Food & Beverage ETF (PBJ), has advanced about 18.7% since the beginning of the year, performing almost in line with SPDR S&P 500 Trust ETF (SPY), which has gained 22.8% over the same period.
Keeping that in mind, I’ll analyze and compare two dividend-paying beverage stocks: The Coca-Cola Company (KO) and Keurig Dr Pepper Inc. (KDP), to determine which is a better investment.
The Coca-Cola Company
Based in Atlanta, Georgia, The Coca-Cola Company is one of the world’s largest beverage companies that produce and sell non-alcoholic beverages. The company’s product portfolio includes soft drinks, water, fruit juices, energy drinks, tea and coffee, and sports drinks. It also owns such well-known brands as Fanta, Fresca, Schweppes, Sprite, Thumbs Up, Aquarius, Ciel, Dasani, Ice Dew, and others.
Shares of Coke are up a moderate 2.7% year-to-date (YTD), underperforming its benchmark and the broader market.
On October 28th, The Coca-Cola Company was named a “Top Pick” at Credit Suisse after a better-than-expected earnings report. Credit Suisse analysts cited the company’s ability to deliver a strong EPS and profitability in “a hard logistics environment” caused by the COVID-19 pandemic. As a result, Credit Suisse established an “outperform” rating for KO, with a price target of $63.
Financial Overview & Analysts Estimates
The company has recently reported solid third-quarter data. In Q3, KO’s revenue rose 14.9% year-over-year to about $10 billion, beating Wall Street’s revenue consensus by $280 million. The company said that the revenue growth was broad-based, with higher demand in regions where coronavirus is fading. In addition, Coke’s sales volume has beaten the pre-pandemic level seen in 2019. The company demonstrated a solid profitability improvement by increasing its operating margin to 28.9% versus the prior-year figure of 26.6%. Its Non-GAAP EPS increased 18% to $0.65, topping analysts’ estimates by $0.07.
The stock’s actual annualized dividend payout is $1.68 a share, which leads to a dividend yield of 3.03% as of October 28th. KO has a record of 59 consecutive years of dividend growth, making the stock attractive for dividend investors. The company’s dividend yield is also well above the sector’s median of 2.32%.
For the fourth quarter, the analysts expect KO’s EPS to stand at $0.43, which is a modest decrease compared to $0.47 a year ago. However, it is important to highlight that the company has beaten EPS estimates in the past eight consecutive quarters. Besides, an $8.92 billion average revenue projection for Q4 indicates a 3.70% growth.
Bullish Options Bets
The options, which expire on December 17th, 2021, saw a massive call buying on Thursday. The open interest for the $57.50 calls rose by 14,848 contracts to a total of 35,869 open contracts (source: barchart.com). A buyer of those calls would need the stock to rise to $57.88 by the December expiration, a gain of about 3.6% from KO stock’s current price.
Keurig Dr. Pepper Inc.
Founded in 1981, Keurig Dr. Pepper Inc. is a Burlington-based beverage company that operates through four key segments: Coffee Systems, Packaged Beverages, Beverage Concentrates, and Latin America Beverage.
Shares of KDP have increased by about 12.7% year-to-date (YTD), outperforming its peer, KO.
On October 1st, the company announced a $4 billion share buyback program, representing about 8% of Keurig’s common stock. The company also revised its full-year guidance, expecting to deliver net sales growth in the range of 6% and 7%, and EPS increase between 13% and 15%. Undoubtedly, that’s a piece of good news that should support the stock’s bullish momentum.
Financial Overview & Analysts Estimates
In terms of financials, Keurig Dr Pepper’s top line has increased by 7.6% on a year-over-year basis to $3.25 billion in the third quarter of 2021, surpassing estimates by $90 million. This growth was driven by higher sales in each business segment, while Beverage Concentrates and Latin America Beverages demonstrated double-digit growth rates. KDP’s GAAP EPS came in at $0.44, well above the consensus of $0.42.
The company plans to reward its shareholders with an annual dividend payout of $0.75 per share, leading to a forward yield of 2.19%, which is almost in line with the sector’s median threshold. Also, the company has only one year of dividend growth, having a -20.08% 5-year growth rate.
Currently, analysts expect KDP’s EPS to grow 16.60% year-over-year in the fourth quarter to $0.45 a share. Following this same trend, analysts expect that its next-quarter revenue should advance to $3.26 billion, implying a rise of about 4.60% year-over-year.
In terms of Forward P/E, KO is currently trading at 24.36x, which is slightly higher than KDP, whose multiple is currently at 21.32x. However, both beverage makers look overvalued compared to the sector’s median of 19.82x.
When it comes to the Forward EV/EBITDA multiple, KO’s EV/EBITDA multiple of 21.05x is about 35% higher than KDP’s 15.51x. Both companies look expensive compared to the sector’s median of 12.16x.
Despite relatively a high valuation, Coke has a better margins profile with gross profit and net income margin of 60.61% and 22.19%, respectively. These numbers exceed the KDP figures by about 7.2% and 64.6%, respectively.
The Bottom Line
I believe that KO is a better investment than KDP at these levels.
The company has a higher dividend yield as well as a higher dividend growth period. Although KDP looks cheaper from a valuation standpoint, I believe that Coke’s premium is worth paying, considering its strong fundamentals and growth prospects.
In addition, options traders are making huge bets on KO stock’s appreciation in the not so distant future.
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