Pepsi Gets Dumped for Coke: What You Need to Know
Apr 4th 2012 6:23PM
Updated Apr 4th 2012 6:24PM
At first, the term "dump" seems a bit harsh. But on second thought, Dunkin Brands (NAS: DNKN) is ending a five-year partnership with its old pal PepsiCo (NYS: PEP) to be exclusive with the world's largest soda maker, Coca-Cola (NYS: KO) . Surely the new duo will be happy together. But where does that leave Pepsi, and which of these stocks looks the most promising for shareholders?
Out with the old
So it goes with most breakups: Details were not disclosed. What we do know is that Dunkin's in-store Pepsi products will be replaced with Coke alternatives starting this month. The soda giant's products, including juices, Dasani, and its line of energy drinks, are expected to move into 9,400 Dunkin locations by August. Nevertheless, the multiyear deal is not set in stone.
Unlike the interpersonal relationships most of us enjoy, marriages in business are never forever. For example, last year Pepsi was the victor over Coke in a bid for exclusive distribution from Papa John's (NAS: PZZA) . The pizza joint agreed to stock its 3,000 stores with Pepsi products as of January. The switch came as part of Papa John's strategy to attract a larger number of younger, male customers to its stores -- a decision that ended a 25-year partnership between Coke and Papa John's.
Don't feel sorry for Coke just yet, though. The leading cola brand still has the world's largest fast-food chain locked down. That's right, McDonald's (NYS: MDC) exclusively carries Coca-Cola products in its 32,000 restaurants worldwide. This is a huge contract in the food-service industry, considering Micky-D's serves an average of 64 million customers a day -- most of whom order a beverage with their meal.
As far as stock performance goes, Coke has a price-to-earnings ratio of 19 and a dividend yield of 2.77%. That compares with Pepsi's P/E of 16, with a dividend yield of 3.09%. Both of the companies' dividends are safe, and I expect their respective stocks to outperform the broader market in the year ahead. On the flipside, Dunkin's stock looks the least appetizing, with shares boasting a pricey P/E north of 104.
In the end, Pepsi and Coke will continue to step on each other's toes as they secure supplier deals in the future. Such is the nature of rivalry. At this point, Coke remains the clear leader in the soft-drink market. Meanwhile, Pepsi has done well in other product lines with its popular snack brands, such as Frito-Lay and Quaker. I like both companies as core holdings for investors and wouldn't make an investment change based on gaining or losing one extra contract.
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At the time this article was published Fool contributor Tamara Rutter owns shares of PepsiCo. The Motley Fool owns shares of Coca-Cola, Papa John's International, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola and PepsiCo and creating a diagonal call position in PepsiCo. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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