Coca-Cola (KO - Get Report) isn't just a widely held stock in retirement portfolios; it's a symbol of American triumphalism. The iconic Coke label is pervasive around the world and remains one of the most beloved, easily recognized brands anywhere. With a high dividend yield (currently 3.06%) and a history of robust capital appreciation, Coke is a stalwart in retirement portfolios.
That's why this article will seem like blasphemy to many investors, but remember: you should never get sentimental about a stock. Hold onto your seat, while we suggest that you sell Coke now, to free your money for more promising growth opportunities. The company is a victim of changing consumer tastes and an increasing emphasis on health conscious foods and drinks. SodaStream (SODA) and Nestle (NSRGY) are better options in the soft drink and growing bottled water categories.
U.S. per-capita consumption of carbonated soft drinks has fallen to its lowest level since 1986. Meanwhile, domestic bottled water sales grew 6.4% in 2015 to a record $15 billion and are projected to grow another 34.7% by 2020, according to Brisk Insights. That growth includes a whopping projected sales increase of 75.1% in the sparkling/mineral water/seltzer segment.
Sales of full-calorie soda in the U.S. have plummeted by more than 25% over the past 20 years. Americans now spend more money every year on bottled water than on Apple iPods or movie tickets. These fast-moving consumer and demographic trends make bottled water one of the best investment categories you'll find today.
Bottled water is now on track to overtake soda as the largest beverage category in two years. Nearly half (48%) of bottled water drinkers reported that they are drinking more flavored waters in lieu of sugary beverage. Also on the rise is consumption of "functional" water, which includes ingredients such as herbs, vitamins, minerals, amino acids, and other healthful additives.
Even worse for Coca-Cola, sugary soda has acquired a stigma. To be sure, New York City lost its bid to ban oversize sodas in a 2014 ruling by the state's highest court. These efforts against soda, spearheaded by then-mayor Michael Bloomberg, couldn't survive legal attacks by beverage industry trade groups whose members include (you guessed it) Coca-Cola.KO data by YCharts
However, New York's defeat paved the way for other taxes and bans throughout the country. Notably, Berkeley, Calif., in 2014 became the first U.S. city to pass a law taxing sugary drinks including sodas. The tax went into effect in 2015 and several other municipalities are trying to follow suit.
Regardless, daily soda consumption among teenagers, a group closely tracked by federal researchers, dropped sharply (by 24%) from 2007 to 2013, compared with about 20% for the country. This has resulted in falling obesity rates.
But there's another existential threat that could be much more hazardous to the soda makers than a tax. Historically, beverage preferences are fixed in early adolescence, when most people begin choosing and buying a favorite brand. But the declines in soda drinking are the most extreme among kids. Just as "Big Tobacco" likes to get customers while they're young and impressionable, so too, does "Big Soda."
As sales of Coca-Cola's soda products have plummeted in the U.S., the company and its peer PepsiCo have scrambled to offer new products better tailored to changing consumer preferences. Iced teas, sports drinks and flavored waters are smaller but expanding slivers of the overall beverage industry. Coca-Cola, for example, has nearly doubled the number of individual products it offers, to 700 in 2015 from 400 in 2004. But the company is swimming upstream against powerful currents and it's weighed down by its core soda business.
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The bottled water industry does face at least one challenge: Consumers' increasing concerns about the environmental effects of bottled water, such as the energy it takes to create plastic bottles and transport them.
One small-cap company has not only tapped into the growing trend toward bottled and functional water, but it's also addressed these environmental concerns: SodaStream. With a market cap of $394.86 million, SodaStream provides home beverage carbonation systems that allow consumers to change ordinary tap water into sparkling or flavored water.
SodaStream does this through sparkling water makers, exchangeable CO2 cylinders, CO2 refills, carbonation bottles, flavors, and other accessories. The Israel-based company sells its products through 70,000 individual retail stores in 45 countries.
SodaStream already has caught the attention of Wall Street and its shares have shot up by 15.14% year to date, compared to a rise of 1.34% for the S&P 500. You're well advised to wait for pullbacks before buying.
If you're looking for a large-cap play on the bottled water phenomenon that's still attractively priced, consider Nestlé , the Switzerland-based international consumer foods behemoth that provides a myriad of brand name nutrition, health, and wellness products.
Nestlé's bottled water revenue accounts for roughly $4 billion of the company's consolidated annual revenues of $100 billion. The growth of the company's bottled water sales is exceeding the bottled water sales of Coke, Pepsi and other rivals. Analysts at RBC give Nestle shares a one-year price target of CHF 82, up from the current price of 74.72. (One Swiss franc currently equals $1.03.)
Meanwhile, although it seems downright un-American, it's time to sell Coke. It begs the question: What about PepsiCo? PepsiCo's more diversified food and beverage offerings make it more recession-proof and resilient to consumer behavioral changes than Coke. If you own PepsiCo, hold off selling for now.
Shares of Coke now trade at about $46; the median one-year analyst consensus for a price target is only $50, for a meager gain of 8.6%. And yet, the stock isn't cheap. Coke's trailing 12-month price-to-earnings ratio (P/E) stands at 27.45, higher than the 27.37 for its industry. Coke had a good run, but its best days are behind it. Your money is better spent on more promising growth prospects.
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