Retirees love dividend stocks, and for good reason. Well-established companies with wide moats and prodigious free cash flow are the backbone to any nest egg. Pepsi (NASDAQ:PEP) and Procter & Gamble (NYSE:PG) are two prime examples of such companies.

But between these two, which is the better buy at today's prices? It's impossible to answer that question with 100% certainty, as the future is simply unknowable. However, by approaching the question from three different angles, we can get an idea for which one we're more comfortable with.

A man looking at a fork in the road.

Image source: Getty Images.

Sustainable competitive advantages

Without a doubt, a company's sustainable competitive advantage -- often referred to as its "moat" -- is the most important thing for beginning investors to focus on. Over the years, no variable has been more predictive of my own investing successes and failures as the strength of the moat of the underlying companies.

At its most basic level, a moat is what makes a company special. It keeps customers coming back decade after decade, and keeps competitors at bay for year after year. Both Pepsi and P&G benefit from the strength of their brands above all else.

P&G is parent to some of the most well-known brands in your bathroom: Crest toothpaste, Downy fabric softener, Gillette razors, and Pampers diapers. The strength of these brands can't be understated: Shoppers trust these brands and are willing to pay a premium for them. This allows management to continually -- and modestly -- raise prices over the years, which leads to compounding returns.

Pepsi, on the other hand, is more than just the namesake cola. The company also owns Gatorade, Lay's Potato Chips, Doritos, Mountain Dew, Cheetos, and many more. Pepsi benefits from the very same moat as Procter & Gamble, as these are some of the strongest brands names in the industry.

If forced to choose between the two, however, I would have to go with P&G. Pepsi has to deal with the long-term headwinds of consumers wanting to know more and more about what they're putting into their bodies. Sadly, most of what Pepsi has to offer isn't that healthy. I believe this is a worldwide phenomenon that will continue in developed countries for some time, and have potentially negative effects on Pepsi's bottom line.

I don't see the same headwinds for P&G, so I'm giving the company the nod here.

Winner = Procter & Gamble

Financial fortitude

We all love it when our companies pay outsized dividends and buy back tons of stock. Those decisions affect our bank accounts rather directly. However, it's also wise for companies to keep some dry power -- a.k.a. cash -- on hand. That's because every company will experience tough financial times.

Those who approach such times with lots of cash have options: buy back stock on the cheap, maintain the dividend, outspend rivals to gain market share, or even make acquisitions. Those who are debt-heavy are in the opposite boat. Tough times expose their fragility and make them weaker.

Here's how P&G and Pepsi stack up in terms of financial fortitude. And remember, P&G is valued at roughly 50% larger than Pepsi.




Net Income

Free Cash Flow

Procter & Gamble

$13.5 billion

$16.5 billion

$15.3 billion

$9.9 billion


$16.2 billion

$30.0 billion

$6.3 billion

$7.4 billion

Data source: SEC filings, Yahoo! Finance. Cash includes cash, short, and long-term investments.

Both companies have relatively healthy balance sheets. Pepsi's free cash flow actually exceeds P&G's, after accounting for the difference in size between the two companies.

However, while Pepsi's debt levels aren't unsustainable, the company would definitely fare worse in an economic downturn -- or a company-specific crisis -- than P&G. Pepsi has almost twice as much debt as cash on hand. P&G doesn't.

Winner = P&G


Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.




PEG Ratio


FCF Payout

Procter & Gamble












Data source: SEC filings, E*Trade. P/E represents figures from non-GAAP earnings.

On this metric, I'm actually going to side with Pepsi. Both have almost identical valuations when it comes to earnings and free cash flow ratios. And their dividend yields are virtually identical. But with only 57% of free cash flow being used to pay the dividend at Pepsi, I believe there's more room for long-term growth.

Winner = Pepsi

The winner is...

So there you have it: P&G comes out ahead. While Pepsi might have the stronger dividend, P&G has a stronger balance sheet, and doesn't face the same long-term headwinds that Pepsi does. I think retirees looking for a place to sock their hard-earned cash would do themselves a favor to investigate P&G for their own portfolio.