Any bet that could offer the trifecta of value, dividends and inflation protection would appear to be a slam dunk pick in today's particularly tricky market. Well, it just so happens that such names exist, and they hail from a somewhat surprising sector: beverage stocks.
Believe it or not, beverage stocks – or shares in companies that make carbonated refreshments, sports drinks, coffees, teas, juices, energy drinks and more – could be an investor's best friend amid a turbulent 2022, says CFRA Research.
"With interest rates expected to rise and inflation near a 40-year high, we view the investment case for soft drink equities as the strongest it has been in some time," writes CFRA's thematic research team.
Before you dismiss this argument as a case of market strategists imbibing something a bit stronger than Diet Coke, let's hear them out.
Beverage stocks, like most consumer staples names, have a lot of what the market most wants this year. They're value stocks, for one thing, which are currently back in fashion at the expense of last year's growth darlings.
Beverage stocks also are defensive names, with relatively stable sales and earnings, strong margins and free cash flow. Those attributes, in turn, support attractive dividends, which soft drink companies have a history of increasing, regardless of economic conditions.
"As such, we view soft drink equities as good inflation hedges due to their ability to leverage brand value to successfully raise prices," the CFRA team concludes.
Of course, not all beverage stocks are created equal, and CFRA Research calls out four names in particular as top Buys.
Have a look at CFRA Research's best beverage stocks to buy below. We'll recap the investment case for each one, and check in briefly with what the rest of Wall Street says about the picks too.
Share prices and other market data as of March 18. Analysts' recommendations courtesy of S&P Global Market Intelligence. Stocks are listed alphabetically.
Coca-Cola
- Market value: $260.5 billion
- Dividend yield: 2.9%
- Analysts' consensus recommendation: Buy
Coca-Cola (KO (opens in new tab), $60.10), one of the best dividend stocks in the Dow Jones Industrial Average, has long been a Warren Buffett favorite. Indeed, the chairman and CEO of Berkshire Hathaway (BRK.B (opens in new tab)) first bought KO back in 1988, and it remains the holding company's fourth largest position today.
The fizzy drinks maker also happens to be as dependable a dividend grower as they come. This member of the S&P 500 Dividend Aristocrats has hiked its payout for 60 consecutive years.
Coca-Cola was hit hard by the pandemic, which shut down restaurants, bars, live events and myriad other venues serving its vast portfolio of sodas, juices, teas, sports and energy drinks. Those sales are now coming back.
The resurrection in revenue prompted CFRA Research analyst Garrett Nelson to upgrade KO to Buy from Hold in January, citing the company's "fundamentals and strong underlying momentum from the rebound in on-premise sales and robust pricing environment."
The Street generally concurs with Nelson's view, giving shares a consensus recommendation of Buy, with high conviction. Twelve analysts rate KO at Strong Buy, six say Buy and eight call it a Hold, per S&P Global Market Intelligence.
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Keurig Dr Pepper
- Market value: $53.6 billion
- Dividend yield: 2.0%
- Analysts' consensus recommendation: Buy
Keurig Dr Pepper (KDP (opens in new tab), $37.81) boasts the best-selling system for making single-serve coffee in North America, and it's among the market leaders in K-cup pods (Green Mountain and Original Donut Shop brands). Of course, the company is also known for beverages such as Dr Pepper and Snapple.
The investment thesis on KDP hinges on a combination of solid financial footing and the habits customers formed during the pandemic era, bulls say.
"KDP is a company that has dramatically improved its balance sheet and has benefited enormously from the surge in ready-to-drink coffee sales since the onset of COVID-19 due to its Keurig segment," CFRA's Nelson notes.
A lighter balance sheet will allow the company to return more cash to shareholders, the thinking goes. And, indeed, KDP authorized a $4 billion stock buyback program in October.
Meanwhile, the stickiness of work-from-home trends should continue to drive strong sales of ready-to-drink java, the analyst adds.
Nelson's colleagues are more mixed in their opinions. Seven analysts rate KDP at Strong Buy, four say Buy, eight call it a Hold and one has it at Sell. Nevertheless, their consensus recommendation works out to Buy.
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Monster Beverage
- Market value: $42.7 billion
- Dividend yield: N/A
- Analysts' consensus recommendation: Buy
The investment thesis on Monster Beverage (MNST (opens in new tab), $80.59) is both compelling and fairly easy to sum up.
"Monster Beverage generated industry-leading gross margins in fiscal 2020, has a net debt-free balance sheet, and is focused on energy drinks, one of the fastest-growing beverage categories prior to the pandemic," writes CFRA's Nelson.
If there's a downside to MNST in the current market environment, it's that the company doesn't pay a dividend. It does, however, have a history of returning cash to shareholders through aggressive share repurchases.
It's also hard to quibble with the stock's potential for price appreciation. Analysts' average target price of $100.29 gives MNST implied upside of 24% in the next 12 months or so. At CFRA, Nelson's target of $110 gives the stock implied upside of 36%.
Lastly, Monster Beverage is a possible acquisition target. "With the company reportedly in merger discussions with Constellation Brands (STZ (opens in new tab)), we remain buyers of MNST shares," Nelson writes.
The Street's consensus recommendation comes to Buy, with solid conviction. Nine analysts call it a Strong Buy, four say Buy and 10 have it at Hold, per S&P Global Market Intelligence.
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PepsiCo
- Market value: $225.2 billion
- Dividend yield: 2.6%
- Analysts' consensus recommendation: Buy
Long-time income investors probably know that PepsiCo (PEP (opens in new tab), $162.79) is a dividend-growth stalwart. This member of the S&P 500 Dividend Aristocrats has lifted its distribution annually for 49 years and counting.
Meanwhile, those with shorter horizons – such as tactical investors and traders – might want to keep an eye on PEP too. An AI stock-picking platform with a strong track record identifies PEP as one of the best stocks to watch for both outperformance and low risk over the next 30 to 90 trading sessions.
Looking farther ahead, CFRA Research praises PEP for its profit prospects, as well as the multi-faceted nature of its operations, among other factors.
"PepsiCo is a stock we continue to like due to its above-average growth profile and beverage/food and snack diversification, which it has benefited from throughout the pandemic," Nelson writes.
The company's high-margin Frito-Lay and Quaker Foods businesses have particularly benefited from stay-at-home trends, the analyst adds, and that's helped blunt the impact of softer beverage sales.
The Street is mostly bullish on PEP, too, giving it a consensus recommendation of Buy. Of the 22 analysts covering the stock tracked by S&P Global Market Intelligence, seven rate it at Strong Buy, four say Buy, 10 have it at Hold and one says Sell.
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