For over a century it has The Coca-Cola Company (NYSE:KO) And Pepsico (NASDAQ: PEP) – or the Pepsi-Cola Company as it was previously known – are engaged in a battle for carbonation supremacy. This battle is also called the Cola Wars. Little has changed for forty years. That is, until now.
According to The Wall Street JournalDr Pepper – from beverage company Neat Dr Pepper (NASDAQ: KDP) — has now tied with Pepsi for second place on the carbonated drinks charts. And if you adjust enough decimal places, Dr Pepper is technically a hair ahead.
According to Beverage Digest, Pepsi briefly held the top spot in the 1980s during Coca-Cola’s New Coke fiasco. However, Pepsi fell to second place and has remained there for almost 40 years. But Dr Pepper has steadily chipped away at Pepsi’s lead.
According to Beverage Digest data analyzed by The Wall Street JournalPepsi had a market share of 13.5%, compared to a market share of only 6.3% for Dr Pepper in the year 2000. But by 2023, both Pepsi and Dr Pepper had a market share of 8.3%. Coca-Cola, in turn, is safely in first place with a market share of 19.2%.
Here’s what this does and doesn’t mean for investors.
Why Keurig Dr Pepper Stock is Worth Watching
Understand that when Dr Pepper is referred to as the second-place holder, it is referring to the brand’s sales volume. However, Keurig Dr Pepper owns and licenses many more brands besides Dr Pepper, including 7UP, Green Mountain Coffee, Canada Dry, Swiss Miss and many more.
These brands give Keurig Dr Pepper a diverse portfolio of carbonated drinks and coffee. Today, sales of the Dr Pepper brand are growing as it gains market share. But tomorrow’s growth could come from elsewhere in the portfolio. That is why having a broad portfolio is a strong point.
Over the past five years, Keurig Dr Pepper’s earnings per share (EPS) have more than doubled. And the company has grown its dividend faster than many of its peers. However, the price-to-earnings (P/E) ratio has halved, meaning the stock has gone sideways.
The good news for investors today is that Keurig Dr Pepper stock is now cheaper than it was five years ago and its dividend yield is almost as high as it ever was at 2.5%. Furthermore, the company is still growing at a modest pace, providing opportunities for future earnings growth and rewarding shareholders.
Why Pepsi Stock is Worth Holding
Just as Keurig Dr Pepper has a strong portfolio of brands, so does Pepsi. Although the Pepsi brand has fallen to third place among carbonated drinks, the company still owns two drinks in the top nine: Mountain Dew and Diet Pepsi.
Keurig Dr Pepper stock may be a better deal than Pepsi stock today. That said, Pepsi may have the stronger business because it not only has a range of drinks, but also a range of snacks. And the snack portfolio makes an important contribution to profits.
In the first quarter of 2024, Frito-Lay North America accounted for 57% of Pepsi’s operating profit. The company is not active in selling snacks in international markets. But taking those international sales into account, Pepsi’s snack profits increase even more.
Pepsi may have fallen to third place when it comes to carbonated drinks, and Dr Pepper fans should rightly take a victory lap. However, Pepsi shareholders need not panic as the company is still strong thanks to its product diversity.
Moreover, Pepsi continues to grow its profits, thanks to its special strength in international markets.
What it all means
Dr Pepper’s second place in 2023 is a nice headline. However, taken alone, this isn’t a good reason to buy Keurig Dr Pepper stock. Those who buy today must believe that the company can grow its portfolio both domestically and internationally. And they have to believe that the company can continue to grow profits and increase what it gives back to shareholders.
For what it’s worth, I believe these are reasonable assumptions.
I also believe it is reasonable for Pepsi investors to continue to hold their shares. Yes, Pepsi itself is now technically in third place. But this is not a company in decline. It is one of the largest and most important consumer companies in the world and can continue to deliver good shareholder returns over the long term.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Move Over Pepsi, there’s officially a new number 2 soft drink behind Coca-Cola, originally published by The Motley Fool
