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Coke and Pepsi: Stocks Vulnerable to Tax On Soda

During the debate over the Obama healthcare legislation, you could almost feel sorry for Coca-Cola (KO) and PepsiCo (PEP). Taxing soda pop and other sugary drinks seemed to be an idea gaining momentum, and not just to raise money to pay for government programs. The idea was to curb obesity and with it some hefty health costs.

A Yale study suggested a tax that raised soda prices by 10% would cut demand by 7.8%. The U.S. Agriculture Department calculated that a 20% tax would reduce caloric intake from sugary beverages by 39-to-49 calories a day per person in the U.S. That’s like every adult and kid saying no thanks to more than two 12-oz. cans of leaded cola a week. Ouch.

One could see where this would lead. Once states started to view cigarette taxes as virtuous levies – we’re saving those poor smokers from themselves; oh, and balancing the state budget in the process – the taxes climbed up and up, and put a damper on demand for tobacco (even demand for addictive substances is elastic, it seems).

And Coke and Pepsi were already having trouble spurring sales growth in the U.S. At Coke, North American sales in volume fell between 1% and 2% in 2008, 2% in 2009, and volume flat during the first half of this year. Pepsi’s beverage business in the Americas suffered a 4.5% volume decline in 2008 and a 7% drop in 2009; bottler acquisitions obscure results for the business in 2010.

For Coke, in particular, these and other problems weighed on the stock in recent years.

KO, PEP Chart

In Coke’s 10-K filing this year, listing risk factors the first one is this: “Obesity and other health concerns may reduce demand for our products.”

The soda makers, of course, mounted a spirited lobbying campaign, and have beaten back nearly all of the tax proposals, which came at the federal, state and local levels. For now. Coke and Pepsi are good at molding public opinion, of course. Coke spends almost $3 billion a year on advertising and Pepsi almost $2 billion, and some of their ads are among the most memorable. For their colas, those ads buy loyalty. And lush profit margins.

KO, PEP Chart

Both companies generate a lot of cash.

KO, PEP Chart

They spend it on stock buybacks.

And ever-rising dividends.

KO, PEP Chart

Overseas they’re certainly growing. And Pepsi’s snack business in North America has growing sales. And an improving economy will lift domestic sales at Coke and Pepsi. What’s more, the soda-tax proponents seem to have gotten busy with other issues in recent months. And even if the tax movement returns, it will likely be only a gradual drag on U.S. sales. Remember, Altria (parent of Philip Morris USA) had a lot of great years as a stock even after the tobacco litigation.

MO Stock Chart

Coke and Pepsi trade like big, global and mature companies. And if that’s what you’re looking for, you could do a lot worse. Warren Buffett’s Berkshire Hathaway still has its 200 million shares of Coke, or 8.7%.

KO, PEP Chart

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