Investment Thesis
Even though both Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) currently receive my hold rating, I consider PepsiCo to be the slightly more attractive choice for dividend income and dividend growth investors. This is particularly due to PepsiCo’s slightly lower Payout Ratio of 66.64% when compared to Coca-Cola’s (70.97%) and the company’s higher growth rates: PepsiCo shows a higher Revenue Growth 5 Year [CAGR] of 6.34% (compared to the 3.50% of Coca-Cola) and a higher Dividend Growth Rate [CAGR] over the past 5 years (7.39% compared to 3.53%). Due to its broader product portfolio and even lower 24M Beta of 0.50 (compared to 0.60 of Coca-Cola), I also consider PepsiCo to be the lower risk investment. From my point of view, all of these factors make PepsiCo the more attractive risk and reward choice.
Coca-Cola and PepsiCo’s Performance within the past 12-month period
When looking at the companies’ performance within the past 12-month period, it can be highlighted that PepsiCo has performed slightly better: while PepsiCo has shown a Total Return of 8.33%, Coca-Cola’s Performance has been -0.32%. The S&P 500, however, has been down 7.73% over the same time period. The Performance of both companies confirms that they can be considered as attractive defense plays in order to reduce the volatility of your investment portfolio.
The Valuation of Coca-Cola and PepsiCo
At PepsiCo’s current stock price of $176, my DCF Model indicates a downside of 10.8%, thus indicating an Internal Rate of Return of approximately 6% for the company.
At Coca-Cola’s stock price of $60, my DCF Model shows a downside of 31%, indicating an Internal Rate of Return of approximately 2%.
The calculation of my DCF Model indicates that PepsiCo is currently the slightly more attractive pick between the two companies. However, it also strengthens my opinion to currently rate both PepsiCo and Coca-Cola as a hold.
Even though my DCF Model shows a downside potential for both companies at the current stock prices, they don't get my sell rating: this is particularly due to the fact that I consider both to be excellent defense plays in order to reduce the volatility of your investment portfolio. My opinion is underlined by PepsiCo’s 24M Beta of 0.50 and Coca-Cola’s 24M Beta of 0.60.
Fundamentals: Coca-Cola vs. PepsiCo
At this moment of writing, Coca-Cola’s market capitalization is slightly higher than PepsiCo’s: while Coca-Cola has a market capitalization of $256.30B, PepsiCo’s is $241.72B.
PepsiCo’s P/E [FWD] Ratio is currently slightly higher than Coca-Cola’s: Coca-Cola has a P/E [FWD] Ratio of 22.85 and PepsiCo’s is 24.36. From my point of view, PepsiCo’s slightly higher P/E [FWD] Ratio is justified due to its broader product portfolio (in contrast to Coca-Cola, PepsiCo does not only operate in the Soft Drinks Industry since it also manufacturers and markets foods and snacks) and higher growth rates: PepsiCo has a Revenue Growth Rate 5 Year [CAGR] of 6.34% while Coca-Cola’s is only 3.50%. At the same time, PepsiCo has a higher EPS Diluted 3 Year [CAGR] Growth Rate of 7.28% when compared to the 1.90% Growth Rate of its competitor. Both are indicators that PepsiCo is ahead when it comes to Growth. PepsiCo’s higher Growth Rates contribute to the fact that I consider the company to be the slightly more attractive choice out of the two.
Even though Coca-Cola has the higher EBIT Margin [TTM] (which is a result of only operating in the Soft Drinks Industry), PepsiCo has a higher Return on Equity: while PepsiCo has an ROE of 53.72%, Coca-Cola’s is 37.77%.
In particular, PepsiCo’s superiority in terms of Growth strengthens my opinion to select the company over Coca-Cola.
Coca-Cola PepsiCo General Information Ticker KO PEP Sector Consumer Staples Consumer Staples Industry Soft Drinks Soft Drinks Market Cap 256.30B 241.72B Profitability EBIT Margin 28.10% 14.18% ROE 37.77% 53.72% Valuation P/E GAAP [FWD] 22.85 24.36 Growth Revenue Growth 3 Year [CAGR] 4.89% 8.76% Revenue Growth 5 Year [CAGR] 3.50% 6.34% EBIT Growth 3 Year [CAGR] 4.36% 4.56% EPS Diluted 3 Year [CAGR] 1.90% 7.28% Income Statement Revenue 43.00B 86.39B EBITDA 13.34B 14.89B Balance Sheet Total Debt to Equity Ratio 151.59% 240.18%
Source: Seeking Alpha
Coca-Cola vs. PepsiCo according to the Seeking Alpha Factor Grades
The Seeking Alpha Factor Grades confirm that PepsiCo is currently the slightly more attractive choice between the two companies: in terms of Growth (D rating for Coca-Cola and C- rating for PepsiCo) and in terms of Momentum (C+ rating for Coca-Cola and B rating for PepsiCo), PepsiCo is rated slightly higher than Coca-Cola.
Coca-Cola and PepsiCo’s Dividend
When taking a closer look at the companies’ Dividend Yield, we find further indicators that PepsiCo is the slightly more attractive choice: while PepsiCo has a Dividend Growth Rate [CAGR] of 7.39% over the past 5 years, Coca-Cola’s is only 3.53%.
The same is confirmed when looking at the companies’ Payout Ratio: while Coca-Cola’s is 70.97%, PepsiCo’s is only 66.64%, leaving more room for future dividend enhancements. Taking into consideration both PepsiCo’s lower Payout Ratio and its higher Dividend Growth Rate [CAGR] over the past 5 years when compared to Coca-Cola, we identify strong indicators that PepsiCo is the slightly more attractive pick for Dividend Income and Dividend Growth Investors.
Coca-Cola vs. PepsiCo according to the Seeking Alpha Dividend Grades
Taking into consideration the Seeking Alpha Dividend Grades, it is further confirmed that PepsiCo is the slightly better pick for investors looking for dividend income and dividend growth: while both companies are rated equally for Dividend Growth (A rating) and for Dividend Consistency (A+), PepsiCo is rated higher in terms of Dividend Safety with an A-, while Coca-Cola receives a B-. This, once again, underlines the theory that PepsiCo is the better fit for dividend income investors.
Risk Factors
When it comes to risks, I also consider PepsiCo to be less risky and therefore the more attractive choice for investors: due to PepsiCo’s lower Payout Ratio (66.64% compared to 70.97%) in combination with its higher growth rates (Revenue Growth 5 Year [CAGR] of 6.34% compared to 3.5% and EPS Diluted 3 Year [CAGR] of 7.28% compared to 1.90%), I consider the risk of a possible future dividend cut to be significantly lower for the company than for Coca-Cola. A dividend cut could have a significant negative impact on the stock price of each company. For this reason, PepsiCo is the lower risk investment for dividend income and dividend growth investors from my point of view.
In addition to that, PepsiCo’s 24M Beta of 0.50 is even lower than the one of Coca-Cola (24M Beta of 0.60), which serves as evidence that you can further reduce the volatility of your investment portfolio by investing in PepsiCo, thus indicating that the company is the slightly more attractive defense play between the two.
Another reason why I see PepsiCo as the lower-risk investment compared to Coca-Cola is the fact that it has a much broader product portfolio than its competitor. This allows it to better compensate for possible revenue declines in some of its business units in times of a recession. This once again strengthens my belief that PepsiCo is the less risky investment.
Conclusion
Even though both Coca-Cola stock and PepsiCo stock currently receive my hold rating (which is mainly a result of their relatively high Valuation), I consider PepsiCo to be the slightly more attractive risk and reward choice. This is due to the company having a broader product portfolio (because it not only operates in the Soft Drinks Industry), a lower Payout Ratio (66.64% compared to Coca-Cola’s 70.97%) and for showing higher Dividend Growth Rates (while PepsiCo has shown a Dividend Growth Rate [CAGR] of 7.39% over the past 5 years, Coca-Cola’s has been 3.53%). All of these factors contribute to the fact that I see PepsiCo as the slightly more attractive choice for dividend income and dividend growth investors.
Author’s Note: I would love to know which one out of the two you prefer and if you hold Coca-Cola or PepsiCo (or even both) in your investment portfolio!
This article was written by
Frederik Mueller
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I specialize in constructing investment portfolios aimed at generating additional income through dividends. My focus lies on identifying companies with significant competitive advantages and strong financials that can provide you with an attractive Dividend Yield and Dividend Growth, thus enabling you to augment your dividend income annually. By combining high Dividend Yield and Dividend Growth companies, you can gradually reduce your dependence on the broader stock market fluctuations.I also assist you in achieving a well-diversified portfolio across various sectors and industries. This diversification strategy aims to minimize portfolio volatility and mitigate risk. I also suggest incorporating companies with a low Beta Factor, which further contributes to reducing the overall risk level of your investment portfolio. My suggested investment portfolios commonly consist of a blend of ETFs and individual companies, emphasizing broad diversification and risk reduction.The selection process for high dividend yield and dividend growth companies within the investment portfolio is meticulously curated. I prioritize the pursuit of total return, encompassing both capital gains and dividends, rather than solely focusing on dividends in isolation. This approach ensures that your portfolio is designed to maximize returns while considering the full spectrum of potential income sources. By leveraging my expertise, you can benefit from a well-crafted investment portfolio that aims to generate extra income through dividends, while reducing risk through diversification, and prioritizing total return.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of KO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
As an investment enthusiast specializing in constructing portfolios aimed at generating income through dividends and emphasizing risk reduction and diversification, I've delved into the comparative analysis between Coca-Cola (NYSE: KO) and PepsiCo (NASDAQ: PEP) extensively.
The analysis you've provided revolves around several key concepts:
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Dividend Metrics and Growth Rates: Comparing the dividend metrics, such as Dividend Growth Rate [CAGR] and Payout Ratio, over the past 5 years, it's evident that PepsiCo boasts a more favorable profile. PepsiCo's higher Dividend Growth Rate and lower Payout Ratio (7.39% and 66.64% respectively) indicate a better potential for dividend income and growth compared to Coca-Cola (3.53% and 70.97%).
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Financial Metrics and Performance: When assessing financial metrics like Revenue Growth, EBIT Margin, Return on Equity (ROE), and historical stock performance, PepsiCo exhibits stronger growth rates (e.g., Revenue Growth 5 Year [CAGR] of 6.34% compared to Coca-Cola's 3.50%) and higher ROE (53.72% compared to 37.77% for Coca-Cola).
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Valuation and Risk: Valuation measures like the P/E ratio [FWD] show PepsiCo slightly higher than Coca-Cola, which the analysis justifies by PepsiCo's broader product portfolio and higher growth rates. Moreover, risk assessment factors such as beta values and broader product diversification favor PepsiCo as a lower-risk investment compared to Coca-Cola.
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Seeking Alpha Factor and Dividend Grades: Ratings provided by Seeking Alpha in terms of Growth, Momentum, and Dividend Safety consistently rate PepsiCo slightly higher than Coca-Cola, further bolstering the argument for PepsiCo's attractiveness.
The conclusion drawn from this analysis points to PepsiCo being the slightly more attractive choice for dividend income and dividend growth investors due to its broader product portfolio, higher dividend growth rates, lower payout ratio, stronger financial metrics, and lower perceived risk.
As for personal preferences or holdings, it's essential to note that my expertise lies in constructing diversified portfolios based on fundamental analysis rather than personal biases. The investment strategy prioritizes companies with significant competitive advantages, strong financials, and potential for both dividend income and growth. The selection process for stocks is meticulous, focusing on total return while reducing risk through diversification.
This comprehensive analysis aligns with my investment philosophy, favoring PepsiCo due to its stronger dividend growth potential, more diverse product portfolio, and better financial metrics compared to Coca-Cola.
Author’s Note: While I currently rate both Coca-Cola and PepsiCo as a hold due to their valuation, the analysis suggests PepsiCo's slightly more attractive risk and reward profile for dividend income and dividend growth investors.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of KO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
