Not Another High-Yield Soda Stock!

Most investors view The Coca-Cola Company as the gold standard in consumer staples. But, one of the firm's Latin American affiliates has nearly tripled Coca-Cola’s 5-year return.

The Coca-Cola Company ($KO) has delivered a 5-year return of just over 38% — excluding dividends.

Meanwhile, Coca-Cola’s Latin American affiliate, Coca-Cola FEMSA ($KOF), has returned more than 95% over the same time period. But that’s not all. Despite its outperformance, Coca-Cola FEMSA trades at a much lower valuation than The Coca-Cola Company while also offering a higher starting yield.

On top of this, FEMSA has a geographic monopoly in many Latin American countries where it is the only firm that bottles and distributes Coca-Cola products.

Coca-Cola FEMSA is a franchise bottler that sells and distributes Coca-Cola beverages in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, and Uruguay. The company also distributes Coca-Cola products in southern Brazil and Buenos Aires, Argentina.

In many of these markets, FEMSA is the only authorized Coca-Cola bottler. Something that gives the company a territorial monopoly across multiple countries.

What’s more, FEMSA isn’t just bottling soda. Their portfolio of Coca-Cola products include staple beverages like bottled water, juice, iced tea, and sports drinks. In Mexico, FEMSA even produces Santa Clara ultra-pasteurized milk.

Somewhat anecdotal, but one time I rented an apartment in Veracruz, Mexico. After coming back from a swim in the ocean, I opened the refrigerator and had an epiphany. Every beverage, be it juice or water, was a Coca-Cola product.

When it comes to valuation, The Coca-Cola Company trades at a price to earnings ratio of 24.30 while offering a 2.81% starting yield.

Coca-Cola FEMSA trades at a price to earnings ratio of 14.77 while offering a 4.22% starting yield. For many years, FEMSA issued two semiannual dividend payments. This is common practice for many Latin American stocks. However, in 2024, the company switched to quarterly dividend payments. A decision that makes the stock more appealing for income investors.

It’s also worth mentioning that FEMSA has a 5-year compound annual dividend growth rate of 11.05%.

I wouldn’t bank on this stock always delivering inflation-beating dividend growth, mostly because Latin American currencies are notoriously volatile and international investors are often subjected to issues regarding foreign exchange rates. But, over the long-term, FEMSA’s dividend should continue to increase.

Wall Street typically has no interest in Latin American stocks. The region doesn’t have the explosive momentum of Asia, and there aren’t a lot of cutting-edge technological developments coming from places like Nicaragua or Guatemala.

But when it comes to a dependable, blue chip business like selling beverages, Coca-Cola FEMSA is a perfectly sound investment. This is a company that serves 276 million consumers throughout Latin America, distributes a portfolio of iconic and trusted brands, and has been issuing dividends since the 1990’s.

FEMSA has outperformed its parent company, yet the stock remains cheap.

At its current valuation, I view Coca-Cola FEMSA as an inexpensive and high-yield alternative to The Coca-Cola Company. With the firm’s low price to earnings ratio, FEMSA could be a great buy-and-hold investment.

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Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.