RIP Big Soda: Now’s The Time to Invest in Bottled Water

Well, it’s official: Americans have finally decided that things go better without Coke. A new report released this month shows that we now drink more bottled water than carbonated soft drinks.

After two decades of robust growth, the consumption of bottled water surpassed soda to emerge as the biggest beverage category by volume in the U.S. in 2016, according to a report released in March by the research firm Beverage Marketing.

One of the surest ways to make outsized gains over the long haul is to invest in accelerating trends that enjoy demographic, cultural and economic tailwinds. The rise of bottled water as an alternative to soda is one such trend. Below, I pinpoint the stock that’s best positioned to profit.

This recession-resistant stock is appealing in the context of an overvalued market poised for a correction and an economy that’s overdue for a downturn. Regardless of President Trump’s actions and the overall economy’s direction, consumers are likely to keep drinking ever-greater amounts of bottled water.

Water: “Liquid gold” for investors…

Soda consumption rocketed higher from the 1950s through the 1990s, as Coke and Pepsi became synonymous with post-World War II affluence.

However, the era of Coke and Pepsi is ending, as soda experiences a serious and sustained decline with no end in sight.

The following assertion seems downright un-American, but Coca-Cola (NYSE: KO) is a stock you should shun. Sure, it’s the most recognizable and respected brand in the world, but a secular shift in consumer consumption habits is taking the fizz out of this erstwhile “buy and hold” stock.

Bottled-water consumption in the U.S. reached 39.3 gallons per capita last year, while carbonated soft drinks slipped to 38.5 gallons, Beverage Marketing reported this month. By contrast, annual per capita soda consumption routinely exceeded 50 gallons in the late 1990s and early 2000s.

It’s not just in America. According to Zenith Global, a consulting firm, the global market for bottled water increased 9% year-over-year to 12.8 billion gallons in 2016, for a total value of $147 billion.

After the world’s decades-long love affair with sugary carbonated sodas, Big Soda faces a big day of reckoning.

The growing stigma of soda…

Wait; it gets worse. Soda is becoming “The New Tobacco,” as it gets targeted by public officials for exacerbating the nation’s obesity epidemic. Concerns about the safety of public drinking supplies, as reflected by the disaster in Flint, Michigan, only fuel the appeal of bottled water.

During the election in November, the conservative Donald Trump eked out a surprising electoral college victory. But at the same time, several progressive cities voted for soda taxes to combat health problems related to caloric, sugary drinks.

Sugary soda beverages are increasingly unpopular, held up as a major culprit for the epidemic of obesity in America, especially among kids accustomed to guzzling jumbo-sized sodas. This trend isn’t new, either: it’s been underway for more than two decades.

U.S. per-capita consumption of carbonated soft drinks has fallen to its lowest level since 1986. Global sales of bottled water products are expected to generate a compounded annual growth rate of 8.4% from now until 2022, according to Brisk Insights. Meanwhile, sales of full-calorie soda in the U.S. have plummeted by more than 25% over the past 20 years. The upshot: bottled water is one of the most compelling growth investments available.

The current anti-soda sentiment has beverage giants such as Coca-Cola and Pepsico (NYSE: PEP) deeply worried. Even diet sodas are experiencing a sharp decline in sales. As consumers increasingly see soda as a vice or a luxury, they appear to be fleeing the category altogether.

Although the big soda companies all sell bottled water, they aren’t that excited about the trend because bottled water is a less reliable line of business for them. Single-serving bottles of water, like Aquafina from Pepsico and Dasani from Coca-Cola, earn margins similar to those of soda, but customers appear to have less brand loyalty to water brands than to Coke or Pepsi.

To be sure, an emphasis on health and wellness is increasingly important for Dr Pepper Snapple Group (NYSE: DPS) , the third-largest soda maker in the U.S. The company has a growing number of innovative beverages in the pipeline that offer reduced calories and better nutrition. Leading energy drink purveyor Monster Beverage (NSDQ: MNST) also is experimenting with low- or no-calorie versions of its best-selling energy beverages.

As these soda companies try to co-opt the move toward bottled water, however, they can’t revise their entrenched business models fast enough to stem the downward pressure on revenue and earnings. No amount of clever marketing can alter this reality.

Big Soda has been frantically revamping its products, eliminating sweeteners such as high fructose corn syrup and marketing smaller-sized containers. They’re also offering new fruit juice alternatives, all to little effect.

The safe haven of Switzerland…

During periods of economic and geopolitical uncertainty, history shows that global investors flock to the safe haven of Switzerland, famous for its prudence and consistency. You can leverage this trend and also profit from the bottled water frenzy, by purchasing shares of defensive growth play Nestlé (OTC: NSRGY).

Switzerland-based Nestlé is the largest food company in the world, providing a wide variety of brand-name nutrition, health and wellness products. This stock offers healthy capital appreciation as well as reliable income.

With operations around the globe and a market capitalization of $239.48 billion, Nestlé sells products that are familiar if not beloved household names. Among its many brands are Perrier, Alpo, Gerber, San Pellegrino, Nesquik, Butterfinger, Baby Ruth, KitKat, Nescafé, Stouffer’s, Carnation, Coffee-Mate, Nestea, Häagen-Dazs, Friskies, Purina … the list of famous names is long.

Nestlé currently controls at least 70 of the world’s bottled water brands, and according to Market Realist, Nestle Waters North America is the leader in the U.S. bottled water industry.

One of the fastest growing niches is high-cost luxury water, which Nestlé has dominated for years with brands such as Perrier and San Pellegrino. Enhancing bottled water with flavor, vitamins and minerals is another hot trend, especially among physical fitness buffs. Here, too, Nestlé leads the way.

Bottled water sales currently account for roughly $4 billion of Nestlé’s annual sales of $100 billion. The growth of the company’s bottled water sales is surpassing the bottled water sales of its rivals, as the Swiss company boosts the production, distribution and marketing of water. Nestlé is now investing $200 million to create seven new U.S. production lines for bottled water.

With a trailing 12-month price-to-earnings ratio of 28.59, Nestlé sports a valuation that’s roughly in line with rivals Coca-Cola (28.47) and Pepsico (25.79). However, the Swiss company boasts better growth prospects. The average analyst expectation is that Nestlé will post earnings growth of 8.5% over the next five years on an annualized basis, compared to 3.01% for Coca-Cola and 6.42% for Pepsico.

Here’s a sweetener that’s good for you: Nestlé’s dividend yield is a solid 2.96% and the company has kept the dividend the same or hiked it every year since 1959. Nestlé provides growth, income and safety, all in a bottle.

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