Factors to consider before investing in beverage stocks
The beverage industry, often viewed as stable and defensive, still presents various growth opportunities for investors. Although it falls under the consumer staples category, understanding the dynamics of beverage stocks is crucial. Here are some essential factors for potential investors to consider.
- Determine if you seek value, income, growth, or a mix. Beverage stocks range from established names like Coke and Pepsi, recognized as Dividend Kings, to the rising stars in categories like energy drinks and coconut water, such as Celsius Holdings and Vita Coco.
- Despite being perceived as slow-growth, certain beverage stocks, like Monster Energy and Celsius Holdings (before a recent decline), have shown significant gains. The capacity for growth remains strong if a new product resonates well with consumers.
- While beverage stocks are often seen as resilient to economic downturns, companies like Coca-Cola and PepsiCo do face some exposure to discretionary spending due to their sales in restaurants, theaters, and other venues.
- Concerns over health and the impact of GLP-1 drugs have raised questions about the longevity of soda growth. Although soda volumes in the U.S. dipped from their all-time highs in the early 2000s, they appear to have stabilized recently. Health issues surrounding energy drinks persist, yet industry growth has remained robust.
Trends in the beverage industry
The beverage sector can broadly be divided into soft drinks and hard drinks.
Soft drinks
For more than ten years, soft drink sales have been marked by a significant decline in soda consumption, particularly diet variants. To counteract this, giants like Coca-Cola and Pepsi are diversifying into energy drinks, sparkling water, and coconut water, capitalizing on their established marketing and distribution capabilities.
The substantial scale of major companies, including Keurig Dr. Pepper (KDP +0.35%), means that new brands often struggle to rise independently, as they are more likely to be absorbed by industry leaders.
Hard drinks
The beer market has seen a shift in demand from large-scale brands like Budweiser to smaller craft brews, reflecting a trend toward diversity in hard drinks similar to that in soft drinks.
The rise of hard seltzers has disrupted the beverage landscape, prompting established brands to introduce their variants. However, this trend may be waning as sales have diminished. While Boston Beer thrives with malt beverages, major companies like Anheuser-Busch/InBev are focusing on acquiring craft beer labels.
In the realm of hard liquor, there has been a notable increase in market share at the expense of both wine and beer, with whiskey and tequila emerging as prominent favorites. Liquor companies are also pursuing the acquisition of increasingly popular craft brands.
Are beverage stocks right for you?
While beverage stocks may not suit every portfolio, many investors can likely find suitable options within this sector. Here are several reasons why beverage stocks may be a fit for you:
- Many beverage stocks offer dividends, with some classified as Dividend Kings, having raised their dividends consistently for over 50 years.
- This industry often exhibits recession-resistant characteristics.
- Established beverage companies have significant competitive advantages thanks to robust distribution networks, strong marketing capabilities, and a history of successful acquisitions, along with wider operating margins.
- New categories such as energy drinks and coconut water yield numerous attractive growth stocks.
- Brand recognition plays a crucial role in the beverage industry.
- Overall, the beverage sector combines safety, income potential, and reliability.
Future outlook
Although health concerns have impacted some companies, such as PepsiCo, the beverage industry is overcoming these challenges. The popularity of zero-sugar options in energy drinks is on the rise, along with healthier alternatives like prebiotic sodas and coconut water.
While iconic brands like Coke and Pepsi remain staples, the possibility for innovation persists due to the low-cost and ubiquitous nature of beverages, which satisfy both needs and desires.
Health-conscious consumers are increasingly willing to invest in nutritious beverages or non-alcoholic options like mocktails. The growing demand for functional drinks, enriched with vitamins and probiotics, is expected to drive growth, with a projected compound annual growth rate (CAGR) of 6.1% through 2029.
Additionally, the surge in low-sugar energy drinks has contributed to growth, showcasing a CAGR of 18% from 2020 to 2024. Overall, the beverage sector continues to offer abundant opportunities, counter to the perception of it being a slow-growth industry.
Key Takeaways
- The beverage industry presents both stable and growth-oriented investment opportunities.
- Beverage stocks include well-known names and emerging brands with growth potential.
- Health trends are influencing new product developments and consumer preferences.
- The sector is often viewed as recession-resistant but is still impacted by discretionary spending.
- Strong brand loyalty and marketing capabilities are advantages for established companies.
- Emerging categories like energy drinks and functional beverages offer expansion potential.
FAQ
What types of beverage stocks should I consider?
Investors can choose from diverse options, including established brands like Coca-Cola and PepsiCo for stability, as well as faster-growing companies in emerging categories like energy drinks.
Are beverage stocks a safe investment?
Many view beverage stocks as relatively safe due to their stable cash flows and recession-resistant characteristics.
What is the outlook for health-oriented beverages?
Health-focused beverages are gaining popularity, especially those with functional ingredients. This trend is expected to contribute to market growth in the coming years.
