Answering One of Life's Persistent Questions: Coke or Pepsi?

High quality, household names, global brands, consistent earnings, and dividends -- Coke (NYSE: KO  ) and PepsiCo  (NYSE: PEP  ) have it all, but which is a sweeter prospect for investors today?

First off, it's good to know that while both are fundamentally excellent businesses, they do not have as much in common as it appears. Coke is focused on beverages, but Pepsi could easily be seen as Frito-Lay due to its large holding in the snack business. Pepsi gets about one third of its earnings from Frito-Lay, so its success is as much about winning the snack aisle as it is about winning the Pepsi challenge.

To get an idea of the fundamental attractiveness of Coke and Pepsi in terms of delivering quality income, let's look at the metrics for safety, dividend yield, quality, and price.

For safety, let's look at the balance sheet--specifically the debt/equity ratio to see how levered the companies are. Next, we'll check the dividend payout ratios to see if there is room for those to grow. There's no sense in counting on a dividend yield if the company will have trouble paying it.

Company Debt/Equity Ratio

Dividend 

Payout Ratio

Coke 0.6 61%
Pepsi 1.1 51%

Source: Morningstar

Coke comes out ahead on balance-sheet safety with a lower degree of debt than Pepsi. Both Coke and Pepsi have safe dividend payout ratios.

Pepsi just announced a 15% hike in its dividend yield, which gives it a forward yield of 3%. Coke's forward dividend yield also sits at 3%. These aren't huge yields but the companies are seriously committed to paying them. Coke has raised its dividend for 52 consecutive years, while Pepsi has raised its dividend for 42 consecutive years. Dividends are not a hobby for Coke and Pepsi.

KO Chart

KO data by YCharts

Turning to quality metrics, operating margins and returns on equity give us a view into what kind of returns for shareholders Coke and Pepsi generate.

Company Operating Margin

Return on Equity

Coke 22% 26%
Pepsi 15% 30%

Source: Morningstar

Both Coke and Pepsi generate excellent returns on equity, and this bodes well for continued dividend growth. This metric illustrates that these companies can find attractive opportunities to invest in their businesses. Coke earns an edge on operating margin -- perhaps a simpler focus on beverages scales better.

All of the metrics that we have compared have been quite close to one another, and price is no different. Coke's P/E is 22 and Pepsi's P/E is 20. Both of these companies are priced above the S&P market average. Should this fact worry investors? I do not see it as a major concern to pay a slight premium to the market for an excellent business. After all, Berkshire Hathaway's Charlie Munger has three rules of investing:

  1. A great business at a fair price is superior to a fair business at a great price
  2. A great business at a fair price is superior to a fair business at a great price.
  3. A great business at a fair price is superior to a fair business at a great price.

Given that the P/E ratio of the S&P 500 is 19, paying a little bit more for either of these two companies with very high returns on equity and above-average dividend yields does not seem too worrisome.

Straightforward business models plus excellent metrics should mean that both companies have shots at delivering good total returns for investors over long-term time horizons. So which is a better buy? A case could be made for either (pun intended), but given the simplicity of its business focus on beverages, cleaner balance sheet, and better margins, the vote here goes to Coke.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2948737, ~/Articles/ArticleHandler.aspx, 11/28/2014 4:46:12 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement