The war between The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) is heating up.
New data from Beverage Digest, a leading trade publication, shows that Pepsi overtook Diet Coke as 2014’s No. 2 soda in the U.S. last year. Although Coke remains the top dog in the soda market, the decline of Diet Coke is yet another warning sign for owners of Coca-Cola stock.
KO stock has underperformed the S&P 500 over the last year, gaining 4% to the S&P’s 10% gain. Meanwhile PEP stock’s 15% gain was more than enough to outperform the benchmark index.
Soda Ain’t Where It’s At
The trade data confirms what’s now a well-known trend in the area: Americans are getting tired of soda. Sales volumes for soft drinks fell 0.9% last year, making for a remarkable 10 straight years of falling domestic sales.
In the KO-PEP war, Coca-Cola is still out front, but its market share is declining. Its share of U.S. nonalcoholic beverages fell to 33.6% last year, while Pepsi’s clocked in at 25.4%.
As for the top three soda spots, Coke came in at 17.6% market share, with Pepsi-Cola’s 8.8% share edging out Diet Coke’s 8.5% share.
While that’s not exactly ideal for either company, its a bigger problem for KO than it is PEP. That’s because KO stock is more of a pure play on soda than PEP is. PepsiCo is so sufficiently diversified into the food and snacks arena that it’s actually faced serious pressure from activist investors to split the beverage side of the business from its food properties.
Pepsi refused, but agreed to a five-year, $5 billion productivity program, also vowing to boost cash returns to shareholders by 35%. That’s probably the one redeeming thing about KO stock right now: in a time where income investors have precious few areas to seek out decent yields, KO pays a 3.3% dividend. PEP’s dividend ain’t too shabby either: its dividend yield comes in at 2.9%.
It’s not for lack of trying that the outlook for KO stock looks bleak.
Rumors have been swirling for years that Coca-Cola would acquire energy drink company Monster Beverage Corp (NASDAQ:MNST), and last year KO acquired a 16.7% ownership stake in MNST stock in a cash-and-swap deal that also gives Coca-Cola global distribution rights for Monster’s portfolio of energy drinks.
Monster’s a mighty desirable target for KO for one simple reason: it’s growing. Unlike sodas, energy drinks are actually becoming more popular in the U.S. with each passing year.
With KO stock seeing two straight years of slumping revenue (a third is expected in fiscal 2015), this zero-growth business will have to rely on cost-cutting, share buybacks and its dividend to supply shareholders any meaningful returns.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or contact him via email at editor@investorplace.com.
