Could the ‘Pepsi Paradox’ make this FTSE 100 stock a buy?
When it comes to brand recognition, of all the FTSE 100 stocks, I reckon there’s one that stands head and shoulders above the rest. Do you know of anyone who hasn’t heard of Coca-Cola HBC’s (LSE:CCH) eponymous beverage? I don’t.
However, I’ve never understood why it remains so popular. In my opinion, PepsiCo‘s Pepsi is far better. Indeed, numerous blind taste tests have found it to be the preferred one, yet Coke remains the world’s best-selling soft drink by miles.
Scientists have called this the ‘Pepsi Paradox’. Although the majority of people choose Pepsi when they don’t know which of the two beverages they are drinking, when they see the labels they generally prefer Coca-Cola’s offering.
The people in white coats have attributed this to the power of branding and the persuasive impact of advertising.
In good company
I’m not sure what first influenced Warren Buffett’s investment vehicle, Berkshire Hathaway, to take a stake in The Coca-Cola Company. But the world’s most famous investor also prefers the drink (and the stock). In his 1991 letter to shareholders, he described himself as a “happy consumer” of five cans a day of Cherry Coke.
At 31 December, the soft drinks giant was Berkshire Hathaway’s fourth-biggest equity holding. Buffett’s company doesn’t own any shares in PepsiCo.
But the company listed on the London Stock Exchange isn’t the same as the one that’s popular with the American billionaire.
The Footsie version bottles and sells the famous drink in 29 countries across Europe, as well as Egypt and Nigeria. The US-quoted stock owns the worldwide rights and has a 21% shareholding in the Swiss-based company.
The investment case
In my opinion, there are plenty of reasons to consider investing in Coca-Cola HBC. It remains the industry leader in the non-alcoholic ready-to-drink sector. And as part of its strategy of having “a beverage for each consumer moment around the clock”, it has many brands and different types of drinks in its portfolio.
Despite its dominance, the group claims there’s plenty of room to grow, including in the countries where it’s more established, such as Italy and Greece.
In addition, it says it has a “relentless focus on cost and efficiency”, although I’d like to think that all the companies I invest in have a similar approach to cost control.
To try and woo income investors, the group’s been steadily increasing its dividend in recent years. We don’t yet know what its payout (if any) will be for 2024. However, for 2023, it was $0.93 a share. At current exchange rates that’s 71.67p, and implies a yield of 2.1%. However, it has to be said, this is well below the FTSE 100 average of 3.6%.
Encouragingly, its share price has done well of late. Since March 2024, it’s risen 40%.
Final thoughts
However, I don’t want to invest. And given that the company appears to have so much going for it, I accept this might sound like another paradox.
But it’s not that I don’t rate Coca-Cola HBC highly, I just think there are better opportunities elsewhere.
Due to intense competition and changing tastes, I’m not convinced there’s as much potential for growth as the company thinks. And its dividend isn’t high enough to get me excited.
The post Could the ‘Pepsi Paradox’ make this FTSE 100 stock a buy? appeared first on The Motley Fool UK.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
