Putting together networks for global distribution of consumer products takes a lot of effort, and both Philip Morris International (PM -2.27%) and PepsiCo (PEP -0.49%) have built up colossal brands with enormous presence around the world. With both stocks offering attractive combinations of growth potential and dividend income, many investors are looking at adding them to their stock portfolios. But which one makes the smarter pick right now? To help investors figure out which of these two consumer giants they should favor, let's compare Philip Morris and PepsiCo on a number of metrics to see which one looks more attractive under current conditions.
Valuation and stock performance
In terms of total return, both Philip Morris International and PepsiCo have delivered solid gains, but Philip Morris has a slight edge. The tobacco giant has produced about a 12% total return for investors over the past year, while PepsiCo has risen just 8% over the same period since October 2015.
As we'll see below, demand for dividend stocks has increased lately, and given that both Philip Morris and PepsiCo have strong track records of dividend success, their valuations reflect their relative popularity. Looking back at earnings over the past 12 months, both Philip Morris and PepsiCo have a trailing earnings multiple of about 23, with the tobacco company having a slight edge of only a fraction of a point.
The edge for Philip Morris widens somewhat when you incorporate forward earnings estimates. Philip Morris' forward multiple is around 19.5, while PepsiCo trades at slightly less than 21 times forward earnings. The net result is a small win for Philip Morris, although the margin of victory is narrow enough that investors shouldn't see it as a major loss for PepsiCo.
As dividend stocks, both Philip Morris and PepsiCo are attractive. Philip Morris has a higher dividend yield at 4.3%, but PepsiCo's 2.9% yield is also well above the market average. Moreover, PepsiCo pays out only around 60% to 65% of its earnings in the form of dividends, compared to more than 95% for Philip Morris right now.
Both Philip Morris and PepsiCo have also grown their dividends over time. PepsiCo has a 44-year streak of raising its dividend annually, making it a member of the prestigious Dividend Aristocrats list. It has also doubled its payout since early 2008. Philip Morris has a shorter history as an independent company, but it has also seen similar long-term dividend growth that has more than doubled its quarterly dividend payment since the middle of 2008. Based on current yield, Philip Morris has the edge, but the comparison on the dividend front doesn't reveal many other major differences.
Growth prospects and risks
Fundamentally, both Philip Morris and PepsiCo have had to deal with challenges and have found ways to overcome them. For Philip Morris, the strong dollar has been a big headwind to overcome, but currency impacts have finally started to slow in recent quarters. Shipment volumes for cigarettes have taken substantial hits recently, and the tobacco giant's long-term strategy seems to foresee that traditional cigarettes will become increasingly unimportant in the global market. Instead, Philip Morris is investing heavily in its iQOS heat-not-burn tobacco technology, making it a key part of its reduced-risk product portfolio. Early demand for iQOS has been encouraging, but Philip Morris will have to a lot more work before the product can truly establish itself as a replacement for its traditional Marlboro brand of cigarettes.
PepsiCo, meanwhile, is making the most of its growth opportunities. Despite some difficulties stemming from regulatory pressure on sugary soft drinks like its namesake cola, PepsiCo has worked hard to emphasize the positive nature of its diversified portfolio of brands. In particular, by having its Frito-Lay snack division as a major part of its operations, PepsiCo isn't stuck with concentrated exposure to beverages, and that gives it a key advantage over its main industry rivals. With other products like its Naked juices and Sabra hummus, PepsiCo is taking its share of healthy-food business and leaving competitors behind.
Based on these three measures, Philip Morris International has the edge for investors looking to maximize immediate income, but PepsiCo's growth trajectory is better established. Philip Morris has growth prospects, but it will take longer for shareholders to see the full benefits of the company's initiatives play out.