Several sugar-sweetened drinks are packed with calories, which provide little to no nutritional value and can lead to chronic diseases, including obesity, heart disease, cancer, tooth decay, and type 2 diabetes. Further, higher consumption of sugary beverages has been associated with an increased risk of premature death.
According to a 2020 study published in the Journal of the American Heart Association, even one serving daily of a sugary soft drink is linked with a higher risk of cardiovascular disease.
Reducing Consumption of Sugar-Sweetened Beverages
Nearly nine U.S. jurisdictions and over 50 countries have implemented some form of consumer tax on sugar-sweetened drinks, particularly by taxing distributors who then pass the cost along to consumers, said Author Scott Kaplan, an assistant professor of economics at the US Naval Academy in Annapolis, Maryland.
Some U.S. cities have enacted taxes on sugary drinks at checkout, typically at the rate of 1% to 2%, Kaplan added. Other cities tax those beverages by the ounce, which increases the overall price of the product.
“Maybe you spend $1 on a 12-ounce can of soda,” he said. “If it’s a 2 cent per ounce tax, that’s an additional 24 cents on your dollar.”
The analysis, published Friday in JAMA Health Forum, evaluated per-ounce tax plans by ZIP code in Boulder, Colorado; Oakland, California; Philadelphia; Seattle; and San Francisco. The study analyzed how consumers change their consumption in response to price changes.
According to this new analysis of restrictions implemented in five U.S. cities, increasing the price of sugar-sweetened sodas, coffees, teas, and energy, sports, and fruit drinks by an average of 31% lowered consumer purchases of those drinks by a third.
“For every 1% increase in price, we found a 1% decrease in purchases of these products,” Kaplan said. “The decrease in consumer purchases occurred almost immediately after the taxes were put in place and stayed that way over the next three years of the study.”
William Dermody, Vice President of Media and Public Affairs for the American Beverage Association, told CNN that such taxes are “unproductive” and hurt consumers, small business, and their employees.
“The beverage industry’s strategy of offering consumers more choices with less sugar, smaller portion sizes and clear calorie information is working – today nearly 60% of all beverages sold have zero sugar and the calories that people get from beverages has decreased to its lowest level in decades,” Dermody added.
4 Beverage Stocks Which Might Be Vulnerable in the Aftermath of Raised Sugary Drink Prices
The Coca-Cola Company (KO), a world-famous beverage company, could face the heat after the impact of the sugar tax. Evolving consumer preferences with an enhanced focus on health and wellness coupled with sustainability have pushed soda makers across the globe to de-emphasize diet branding as they sharpen their focus on zero-sugar offerings.
KO sells its products under the Coca-Cola, Diet Coke/Coca-Cola Light, Cola Zero Sugar, Fanta, Sprite, and other brands. The company is constantly transforming its portfolio, from reducing sugar in its drinks to bringing innovative new products to the market.
Consumers worldwide are also turning to sparkling water as the low-sugar, low-calorie substitute for soda and other sugary drinks. On October 26, 2023, KO announced that its 500 ml sparkling beverage bottles in Canada will be made with recycled plastic by early 2024. This marked the first time sparking drinks will be sold in bottles made from 100% recycled plastic across the country.
Coca-Cola paid a dividend of 46 cents ($0.46) to shareholders on December 15, 2023. The beverage company has raised its dividend for 61 consecutive years. Its annual dividend of $1.84 translates to a yield of 3.08% on the current share price. The company’s dividend payouts have increased at a 3.4% CAGR over the past five years.
KO’s trailing-12-month gross profit margin of 59.14% is 75.4% higher than the 33.72% industry average. Likewise, its 31.46% trailing-12-month EBITDA margin is 179.4% higher than the industry average of 11.26%. Also, the stock’s 23.92% trailing-12-month net income margin is significantly higher than the industry average of 4.90%.
For the third quarter that ended September 29, 2023, KO’s non-GAAP net operating revenues increased 7.8% year-over-year to $11.91 billion. Its non-GAAP gross profit grew 10.2% year-over-year to $7.20 billion. Its non-GAAP operating income rose 8.5% from the previous year’s quarter to $3.54 billion.
In addition, the beverage giant’s non-GAAP net income came in at $3.21 billion, or $0.74 per share, up 6.6% and 7.2% year-over-year, respectively.
“We delivered an overall solid quarter and are raising our full-year topline and bottom-line guidance in light of our year-to-date performance,” said James Quincey, Chairman and CEO of The Coca-Cola Company.
As per the updated full-year 2023 guidance, KO expects to deliver non-GAAP revenue growth of 10%. The company’s non-GAAP EPS growth is expected to be 7% to 8%, versus $2.48 in 2022. It further anticipates generating a non-GAAP free cash flow of nearly $9.50 billion.
Analysts expect KO’s revenue and EPS for the fourth quarter (ended December 2023) to increase 4% and 7.6% year-over-year to $10.59 billion and $0.48, respectively. Moreover, the company surpassed consensus revenue and EPS estimates in each of the trailing four quarters.
Another beverage stock, PepsiCo, Inc. (PEP), might have to deal with the storm following the sugar tax impact. The company operates in seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region.
On November 14, PEP announced two new ambitious nutrition goals as part of PepsiCo Positive (pep+) – the company’s end-to-end strategic transformation – which aims at reducing sodium and purposefully delivering important sources of nutrition in the foods consumers are reaching for.
By 2030, PepsiCo aims for at least 75% of its global convenient food portfolio volume to meet or be below category sodium targets.
PEP’s trailing-12-month gross profit margin and EBIT margin of 54.03% and 14.59% are 60.2% and 73.1% higher than the industry averages of 33.72% and 8.43%, respectively. Also, the stock’s trailing-12-month levered FCF margin of 6.86% is 41.2% higher than the industry average of 4.86%.
PEP pays a dividend of $5.06 per share annually, translating to a 3% yield on the prevailing price. Its four-year average dividend yield is 2.72%. The company’s dividend payouts have grown at a CAGR of 7.1% over the past three years. PepsiCo has raised dividends for 51 consecutive years.
PEP’s net revenue increased 6.7% year-over-year to $23.45 billion in the third quarter that ended September 9, 2023. Its non-GAAP gross profit grew 8.8% from the year-ago value to $12.77 billion. Its non-GAAP operating profit increased 12.1% year-over-year to $4.03 billion.
Further, the company’s non-GAAP attributable net income came in at $3.11 billion and $2.25 per share, indicating increases of 13.7% and 14.2% year-over-year, respectively.
Street expects PEP’s revenue and EPS for the fourth quarter (ended December 2023) to increase 1.5% and 3.1% year-over-year to $28.42 billion and $1.72, respectively. Moreover, the company surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is remarkable.
Third stock, Monster Beverage Corporation (MNST), known for its energy beverages and concentrates, could also be impacted by sugary drink taxes, which are resulting in a sharp drop in consumer sales.
On November 8, MNST’s Board of Directors authorized a new share repurchase program for the repurchase of up to an additional $500 million of the company’s outstanding common stock. As of November 7, nearly $282.8 million remained available for repurchase under the company’s previously authorized repurchase program.
MNST’s trailing-12-month gross profit margin of 52.58% is 55.9% higher than the 33.72% industry average. Its 28.81% trailing-12-month EBITDA margin is 155.8% higher than the industry average of 11.26%. Also, the stock’s 22.62% trailing-12-month net income margin is considerably higher than the industry average of 4.90%.
During the third quarter of 2023, the company continued the roll-out of its first flavored malt beverage alcohol product, The Beast Unleashed™, with the goal of being available in substantially all the U.S. by the end of 2023. Further, Nasty Beast™, its new hard tea, will be launched initially in four flavors, in 12 oz. variety packs and 24 oz single-serve cans, early this year.
MNST’s net sales increased 14.3% year-over-year to $1.86 billion in the third quarter that ended September 30, 2023. Its gross profit was $983.76 million, up 18% from the prior year’s quarter. The company’s net income came in at $452.69 million, or $0.43 per common share, compared to $322.39 million, or $0.30 per common share, in the prior year’s period, respectively.
Analysts expect MNST’s revenue for the fourth quarter (ended December 2023) to grow 16.1% year-over-year to $1.76 billion. The consensus EPS estimate of $0.39 for the same period indicates an improvement of 36.5% year-over-year.
Lastly, Keurig Dr Pepper Inc. (KDP) could be vulnerable to the aftereffects of increased sugary beverage prices. From carbonated soft drinks to premium waters and everything in between, Keurig Dr Pepper provides a diverse portfolio of ready-to-drink beverages to satisfy every consumer’s need.
On December 7, KDP announced that its Board of Directors declared a regular quarterly cash dividend of $0.215 per share, payable on January 19, 2024. The company’s annual dividend of $0.86 translates to a yield of 2.69% of the current share price.
Also, on October 26, KDP and Grupo PiSA announced that Keurig Dr Pepper will sell, distribute, and merchandise Electrolit®, a premium hydration beverage, across the U.S. as part of a long-term sales and distribution agreement.
The long-term partnership extends KDP’s portfolio into sports hydration, a key white space category for the company, and is designed to considerably expand Electrolit’s distribution and continue the brand’s accelerated growth.
KDP’s trailing-12-month gross profit margin of 53.50% is 58.6% higher than the 33.72% industry average. Likewise, the stock’s trailing-12-month EBITDA margin of 26.64% is 136.6% higher than the industry average of 11.26%. Furthermore, its 13.16% trailing-12-month net income margin is 168.8% higher than the industry average of 4.90%.
For the third quarter that ended September 30, 2023, KDP’s net sales increased 5.1% year-over-year to $3.81 billion. Its gross profit grew 11% year-over-year to $2.11 billion. Its income from operations rose 127.4% from the year-ago value to $896 million. Also, net income attributable to KDP and EPS came in at $518 million and $0.37, up 187.8% and 184.6% year-over-year, respectively.
As per its guidance for the full year 2023, KDP expects net sales growth of 5% to 6%. The company’s adjusted EPS growth is projected to be 6% to 7%.
Analysts expect KDP’s revenue and EPS for the fourth quarter (ended December 2023) to grow 3.1% and 8.6% year-over-year to $3.92 billion and $0.54, respectively. Moreover, the company surpassed consensus revenue estimates in each of the trailing four quarters.
Bottom Line
According to a recent study conducted by JAMA Health Forum, five U.S. cities that imposed taxes on sugary beverages saw prices rise and a drop in consumer sales by 33%.
With sugar-sweetened drinks considered known contributors to several health issues such as obesity, diabetes, and heart disease, taxes on those drinks are implemented to lower consumption. Reduced consumer sales because of these taxes could be pretty alarming for several beverage stocks, including KO, PEP, MNST, and KDP.
The beverage industry is not just about traditional drinks anymore. With a significant surge in health awareness among consumers and the global shift toward sustainability, companies are innovating their products to meet the new demands.
Beverage firms are consistently working toward reducing sugar content in their products or are introducing zero-sugar offerings to cater to health-conscious consumers. Also, the introduction of additional healthy ingredients by different industry players is gaining traction. For example, probiotic drinks, green teas, and beverages infused with minerals and vitamins.
Like any other industry, the beverage sector has its share of opportunities and challenges. As the industry evolves, companies that fail to innovate or adapt to changing consumer preferences risk losing market share.
Given these factors, it seems prudent to wait for a better entry point in beverage stocks KO, PEP, MNST, and KDP. While the industry-wide challenges could impact these stocks in the near term, they appear in good shape to thrive in the long run.
