The soft drinks sector has long been a fruitful place to make money. Some of the best-known brands are available to investors via shares in UK and overseas-listed companies.

Once again, the soft drinks market is proving its resilience in volatile times, though the companies face headwinds in the form of regulation, an uncertain consumer spending outlook and the threat from private-label products, which could gain popularity as the cost of living goes up.

To the soft drink sector’s benefit is the fact products are typically low price so consumers may not cut back on them in the way they might for bigger ticket items.

Our key UK-listed soft drinks pick is AG Barr (BAG), the Scotland-headquartered company behind iconic tipple Irn-Bru. Its shares have rallied amid investors’ thirst for its impressive resilience against inflationary pressures.

AG Barr’s sales and profits for the year to January 2022 surpassed pre-pandemic levels on strong trading and a tailwind from the reopening of hospitality. Putting pandemic disruption behind it, AG Barr said on 29 March that trading in the early weeks of the new financial year was ‘well ahead’ of the prior year and we welcome the fact the company has resumed paying dividends.

Its shares aren’t particularly cheap, trading on 18.1 times forecast earnings. However, it has a cash-rich balance sheet to withstand shocks as well as to fund future organic and inorganic growth.

AG Barr, which also owns Rubicon, Tizer, Strathmore spring water and ready-to-drink cocktails label Funkin, is focused on building a multi-beverage brand portfolio with a specific focus on higher growth sectors.

The investment in plant-based foods company Moma, whose oat milk is a premium quality product with significant potential and which sits alongside Moma’s existing porridge and oat-based products, demonstrates AG Barr is responding to shifting consumer tastes and preferences.

OTHER NAMES IN THE SECTOR

The UK stock market has quite a few names in the soft drinks sector including Coca-Cola bottling partners such as Coca-Cola HBC (CCH), though this is a high-risk stock given the company’s significant exposure to Russia and Ukraine.

FTSE 250 constituent Britvic (BVIC) owns such brands as Fruit Shoot, Wimbledon tennis tournament favourite Robinsons and Tango. Its shares trade on 15.4 times forward earnings and offer a prospective 3.3% yield.

Like AG Barr, Britvic also plays in the high growth plant-based drinks category following the acquisition of Plenish.

Investors should note that Britvic also produces and sells various PepsiCo soft drinks brands including Pepsi and 7UP under exclusive agreements.

While the mutually beneficial relationship between Britvic and PepsiCo is longstanding, any future change could have an impact on the Britvic share price, while investment bank Morgan Stanley flags the risk to Britvic from private label competition in Western Europe.

On London’s AIM market is Nichols (NICL:AIM), the diversified soft drinks group behind the Vimto brand popular in the UK, Middle East and Africa. While inflation is a concern, Nichols’ trading update on 27 April signalled a good start to 2022 with group revenue up 28.9% year-on-year to £39.6 million in the three months to March.

Vimto has outperformed the wider UK soft drinks market year-to-date, achieving growth of 10.8% in value terms versus 9.8% across the market.

Nichols’ international business softened towards the end of the first quarter after a solid start, due to temporary transport logistics disruption to canned drink supplies into Africa in March which have now been resolved.

Broker Singer Capital Markets says Nichols is ‘a branded international business with above-average growth prospects and a strong balance sheet’.

PREMIUM MIXERS

£2.1 billion premium mixer business Fevertree Drinks (FEVR:AIM) continues to perform well, though a high price to earnings ratio of almost 46 times means any disappointments will be harshly punished by the stock market.

Indeed, the sharp increase in commodity prices exacerbated by the conflict in Ukraine prompted the upmarket mixer brand’s management on 16 March to cut earnings guidance.

Lower down the market cap ranks is another play on the global trend towards premiumisation, namely £24 million market cap East Imperial (EISB), a posh tonic water, ginger beer and grapefruit soda company which is inking distribution deals. 

The big US names

The US stock market features beverages giants Coca-Cola (KO:NYSE) and PepsiCo (PEP:NASDAQ). Both have just reported forecast-beating quarterly results as the world reopens after the pandemic, with price hikes helping to offset the impact of cost inflation and fresher brands gaining traction.

Consumers continue to gulp down Coca-Cola’s iconic namesake brand as well as healthier variant, Coca-Cola Zero, the Bodyarmor and Powerade sports drinks and its increasingly popular Topo Chico hard seltzer.

Meanwhile PepsiCo, the drinks maker behind Pepsi, 7UP and Gatorade, has successfully raised prices in response to commodities and energy cost inflation and in a testament to its resilience, lifted its full year organic sales growth forecast from 6% to 8%. PepsiCo has also made a foray into alcohol through Hard Mtn Dew, made in partnership with Boston Beer (SAM:NYSE).

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