Beverage Buys

09/01/2015 8:00 am EST

Focus: STOCKS

Genia Turanova

Editor, Leeb Income Performance

Some consumer stocks, namely consumer staples, are so-called defensive, less economically sensitive stocks, suggests Genia Turanova, editor of Leeb Income Performance.

Stocks in the consumer staples category, generally, operate in mature businesses and the companies likewise have also matured, but continue to increase their earnings per share, albeit at a lower pace than the overall market.

Due to both higher dividend yield and business stability (staples, always in demand, correlate little with the business cycle), these are quintessential defensive stocks.

They won’t stay up when the market is sharply down, of course, but the stability of their businesses and reliability of cash flows make these stocks less volatile.

Further, consumer stocks are among the beneficiaries of weak commodity prices. As gas prices remain relatively modest, consumers benefit.

We currently recommend two beverage companies, Coca-Cola (KO) and Dr. Pepper Snapple Group (DPS).

These have also been helped by strong trends in convenience stores, lower commodity prices, and have also benefited from better pricing trends, as they were able to increase selling prices.

While Coke clearly has to do more work to improve its growth, this is a generally safer stock (as a consumer staple) with steady business and strong cash flows.

Earlier this year, the company’s board approved the 53rd consecutive annual dividend increase, raising the quarterly dividend 8% from 30.5 cents to 33 cents per common share, equivalent to an annual dividend of $1.32 per share, up from $1.22 per share in 2014.

The other beverage company we currently recommend, Dr. Pepper Snapple, beat its second-quarter earnings expectations.

While revenues matched projections, the company raised its earlier guidance for both sales and earnings.

We see that the company handles currency trends well, on top of it being minimally exposed despite higher currency headwinds.

Plus, Dr. Pepper continues to take advantage of better pricing (in the quarter, for instance, they were able to realize 2% growth on price/ mix—and also posted a 1% volume growth)—and its innovations continue favorably impacting growth.

For growth and dividend income, Coca-Cola, and Dr. Pepper Snapple remain buys.

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