The 9 Highest Potential Returns in Soft Drink Stocks

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In a speech to the Financial Planning Association, legendary Vanguard Founder and former CEO John Bogle made an observation that's absolutely critical to understanding where the best stock returns come from -- and how to find the next great stock to buy.

He told the assembled guests that only three things drive investor returns:

  • Dividends
  • Earnings growth
  • Changes in valuation

That's all it comes down to. Historically, stocks have returned 9.6% per year on average -- 5%, 4.5%, and 0.1% from dividends, earnings growth, and valuation changes, respectively. Naturally, the best stocks to buy are the ones that will produce the highest combined return.

So which soft drink stocks will earn investors the best returns today? Obviously, no one can say with total certainty. You should always take future estimates with a grain of salt, particularly when analyst forecasts are involved. In fact, studies show that analysts' long-term earnings per share estimates tend to be off by some 40%, so I've reduced their estimates accordingly.

But investing is all about making predictions based on imperfect knowledge of the future. As long as we're aware of the need to think critically about a company's prospects and to build a margin of safety into our stock purchases, analyst estimates can be a helpful tool for generating ideas. In this series, I run the numbers to round up the stocks that represent their implied best buys today. Here are our assumptions:

Company

Dividend Yield (current)

5-Year Growth Rate (reduced by 40%)

Assumed Price-to-Earnings Ratio (in 2016)

Fomento Economico Mexicano (NYS: FMX) 1.5%8%17
Coca-Cola (NYS: KO) 2.8%6%15
Coca-Cola Enterprises2%8%16
Dr Pepper Snapple (NYS: DPS) 3.2%6%15
Embotelladora Andina (NYS: AKO.A) 3.9%7%15
Coca-Cola Hellenic Bottling (NYS: CCH) 0%6%14
Coca-Cola FEMSA1.9%8%16
PepsiCo (NYS: PEP) 3.3%4%13
Hansen Natural (NAS: HANS) 0%10%19

Source: S&P Capital IQ. Includes stocks on major U.S. exchanges capitalized over $200 million, with positive earnings and at least one analyst issuing long-term earnings estimates. 2016 price-to-earnings multiple estimated at 8.5 + growth rate. 

And here are their implied five-year annualized returns for shareholders. I've ordered the three return components by their reliability -- first dividends, then earnings growth, then valuation.

Company

Dividend Return*

Earnings Growth Return

Valuation Return

Implied Cumulative Annual Return

Fomento Economico Mexicano2%8%16%26%
Coca-Cola3%6%3%13%
Coca-Cola Enterprises2%8%4%14%
Dr Pepper Snapple3%6%(3%)7%
Embotelladora Andina4%7%(4%)7%
Coca-Cola Hellenic Bottling0%6%1%7%
Coca-Cola FEMSA2%8%(4%)6%
Pepsico3%4%(4%)4%
Hansen Natural0%10%(12%)(2%)

Source: Author's calculations. *Assumes dividend growth at rate of earnings growth.

The raw numbers tell us that these are the nine most promising names in soft drinks. I included this many, despite the fact that the implied returns toward the bottom of the list don't look too impressive, to give you a better sense of what those returns look like. For instance, as I'm a shareholder of Hansen Natural, this is going to prompt me to take a closer look at the stock's valuation.

Of course, analysts' growth assumptions for any individual company could prove overly optimistic or pessimistic, as could their future valuations, so the implied cumulative returns are hypothetical. That said, this list helps you fous on this sector's highest potential returners -- and provides an excellent starting point of names for further research.

So don't stop here. If any of these stocks interest you, add them to your personalized stock Watchlist to find out more about them. If you haven't started one yet, click here to begin.

At the time this article was published
Foolish contributor
Ilan Moscovitzdoes not own shares in any companies mentioned here. You can follow him on Twitter@TMFDada. The Motley Fool owns shares of PepsiCo and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Coca-Cola Hellenic Bottling, Fomento Economico Mexicano, Coca-Cola, Hansen Natural, PepsiCo, and Embotelladora Andina.Motley Fool newsletter serviceshave recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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