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Coca-Cola Is a Great Company, But I Think This Stock Is a Better Investment | The Motley Fool

Why Coca-Cola Remains a Beverage Giant, But This Under-the-Radar Stock Might Offer Even Better Investment Potential

In the world of consumer staples, few companies command the kind of universal recognition and loyalty that The Coca-Cola Company (NYSE: KO) does. With its iconic red cans and bottles gracing shelves in over 200 countries, Coca-Cola isn't just a soft drink—it's a cultural phenomenon. The company has built an empire on fizzy beverages, but its portfolio extends far beyond that, encompassing juices, teas, sports drinks, and even bottled water brands like Dasani and Smartwater. For investors, Coca-Cola has long been a go-to choice for stability, reliable dividends, and a moat that's as wide as the Mississippi River. Yet, as much as I admire this Atlanta-based behemoth, there's another stock in the beverage sector that I believe edges it out for long-term growth potential. That stock is Keurig Dr Pepper (NASDAQ: KDP), a company that might not have the same household name cachet but packs a punch in terms of innovation, market positioning, and valuation. In this deep dive, we'll explore why Coca-Cola is undeniably great, but why Keurig Dr Pepper could be the smarter pick for your portfolio right now.

Let's start with what makes Coca-Cola so appealing. Founded in 1886, the company has weathered economic storms, world wars, and shifting consumer tastes with remarkable resilience. Its secret sauce? A combination of powerful branding, a vast distribution network, and a relentless focus on marketing. Think about it: Coca-Cola's advertising budget alone rivals the GDP of small nations, and campaigns like "Share a Coke" or its perennial holiday ads have kept the brand fresh in consumers' minds. Financially, Coca-Cola is a dividend aristocrat, having increased its payout for 62 consecutive years. As of mid-2024, it offers a forward dividend yield of around 3%, backed by a payout ratio that's sustainable at about 75% of earnings. In its most recent quarterly report, the company reported net revenues of $11.3 billion, up 3% year-over-year, with organic revenue growth of 11%. This growth was driven by price increases and volume gains in key markets like North America and Europe, even as inflation pressures eased.

But Coca-Cola's strengths extend beyond numbers. The company's economic moat, as Warren Buffett would say (and he should know, as Berkshire Hathaway is its largest shareholder), is fortified by its intangible assets. Patents on formulas? Sure, but more importantly, the emotional connection people have with the brand. In emerging markets, Coca-Cola is often synonymous with aspiration and modernity. The company has also smartly diversified, acquiring brands like Costa Coffee to tap into the premium coffee segment and investing in healthier options like vitaminwater to counter the soda backlash. Sustainability efforts, such as aiming for 100% recyclable packaging by 2025, add to its appeal for ESG-focused investors. All told, Coca-Cola's total return over the past decade has been solid, outperforming the S&P 500 in defensive periods, though it lags in bull markets due to its mature status.

However, here's where the "but" comes in. While Coca-Cola is a safe, steady eddy, it's not without challenges. The beverage industry is evolving rapidly, with consumers increasingly ditching sugary sodas for healthier alternatives like sparkling water, energy drinks, and functional beverages. Coca-Cola's core soda business, while still dominant, has seen flat or declining volumes in developed markets. The company trades at a premium valuation—around 24 times forward earnings—which might not scream "bargain" in an era of high interest rates. Moreover, its growth rate, projected at about 5-7% annually, is respectable but not explosive. For investors seeking more upside, especially in a post-pandemic world where at-home consumption and premium products are booming, there might be better options.

Enter Keurig Dr Pepper, the result of a 2018 merger between Keurig Green Mountain and Dr Pepper Snapple Group. This isn't your grandfather's soda company; it's a diversified powerhouse with a foot in both hot and cold beverages. Keurig Dr Pepper owns a portfolio of over 125 brands, including household names like Dr Pepper, Snapple, Canada Dry, and 7UP, as well as the ubiquitous Keurig single-serve coffee system. What sets KDP apart is its innovation in the at-home brewing space. The Keurig ecosystem, with its pods and machines, has revolutionized how people consume coffee, tea, and even cocktails (yes, they have a Drinkworks system for that). In a world where remote work and home entertainment are the norm, this positions KDP perfectly.

Financially, Keurig Dr Pepper is firing on all cylinders. In its latest quarter, the company posted net sales of $3.9 billion, a 3.5% increase, with adjusted earnings per share up 7%. Organic sales growth was even stronger at 4.3%, driven by higher pricing and volume in its coffee and refreshment segments. Unlike Coca-Cola, which relies heavily on carbonated soft drinks (about 60% of revenue), KDP's mix is more balanced: coffee accounts for roughly 35%, cold beverages 60%, and international the rest. This diversification provides a buffer against category-specific headwinds. For instance, while soda volumes dip, Keurig's coffee pods have seen consistent double-digit growth, fueled by partnerships with brands like Starbucks and Dunkin'.

Valuation-wise, KDP looks like a steal compared to Coca-Cola. It trades at about 18 times forward earnings, with a price-to-sales ratio of 3.2 versus Coke's 6.0. The dividend yield is a competitive 2.5%, and the company has been aggressive with share buybacks, repurchasing $500 million worth in the past year. Growth prospects are brighter too: Analysts project annualized earnings growth of 8-10% over the next five years, outpacing Coke's 6%. This is thanks to strategic moves like expanding into ready-to-drink coffees, acquiring niche brands like CORE Hydration, and leveraging e-commerce for direct-to-consumer sales. Internationally, KDP is just scratching the surface, with only 10% of revenue from outside North America, compared to Coke's 60%. There's massive runway in markets like Europe and Asia, where single-serve coffee is gaining traction.

But it's not just about the numbers—KDP's competitive advantages are compelling. The Keurig platform creates a razor-and-blade model: Sell the machine cheaply, then profit from recurring pod sales. This sticky ecosystem locks in consumers, much like Apple's iPhone and apps. On the soft drink side, Dr Pepper's unique flavor profile gives it a cult following, and it's often the third wheel in the Coke-Pepsi duopoly, allowing it to capture market share without direct confrontation. Sustainability is another win: KDP aims for 100% recyclable pods by 2025 and has reduced water usage in production by 20% since 2018.

Of course, no investment is without risks. For Coca-Cola, regulatory pressures on sugar content and plastic packaging could intensify, while currency fluctuations (given its global footprint) add volatility. For KDP, supply chain issues with coffee beans or competition from Nespresso could dent margins. Both companies face inflation in raw materials like aluminum and sugar, but KDP's pricing power has held up well.

In comparing the two, Coca-Cola is the blue-chip stalwart—perfect for conservative investors who prioritize dividends and sleep-well-at-night stability. It's a company that will likely chug along for decades, much like it has for over a century. But if you're looking for a blend of growth, value, and innovation, Keurig Dr Pepper stands out. Its lower valuation, diversified portfolio, and exposure to high-margin categories like single-serve beverages make it a more dynamic choice. Personally, while I respect Coca-Cola's legacy, I'd allocate fresh capital to KDP for its potential to deliver superior returns over the next 5-10 years. Investors should do their due diligence, but in the ever-thirsty beverage market, this underdog might just quench your portfolio's need for upside.

To wrap up, both stocks deserve a place in a well-rounded portfolio, but if I had to choose one today, it's Keurig Dr Pepper. The beverage industry is vast and evolving, and while Coke remains king, sometimes the prince has more room to grow into the crown. (Word count: 1,128)

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