Philip Morris International (NYSE:PM) and Coca-Cola (NYSE:KO) are two of the most well-known consumer staples stocks in the world. PMI sells top cigarette brands like Marlboro. Coca-Cola sells its namesake soda along with a growing portfolio of carbonated and non-carbonated drinks.

I compared these two stocks back in April, and concluded that PMI's stronger growth, its higher dividend, and an easier-to-understand business made it a better buy. Since that article was published, Coca-Cola rose 7%, but PMI fell 5%. Was I wrong in my earlier assessment? Let's examine both companies again to find out.

A glass bull and bear.

Image source: Getty Images.

Comparing PMI and Coca-Cola's businesses

Back in 2008, Altria (NYSE:MO) spun off its overseas business as Philip Morris International. At the time, PMI was supposed to capitalize on the growth of overseas markets with higher smoking rates and more lenient regulations than the US market.

But that turned into a double-edged sword as the dollar strengthened. Tough currency headwinds over the past few years, along with severe economic issues in certain markets (like Latin America), throttled PMI's growth, as its revenues were reported in US dollars. To diversify away from cigarettes, PMI invested in e-cigarettes and other alternative tobacco products like iQOS, a smokeless device that heats tobacco sticks instead of burning them.

Coca-Cola generates most of its revenue by selling concentrated syrup to bottlers, which finish the bottling, packaging, and shipping process. It also invests in these bottlers, which operate separately and generate revenues for its Bottling Investments Group.

Coca-Cola struggled with declining soda consumption over the past few decades as consumers shifted toward healthier drinks. To offset those declines, Coca-Cola introduced reduced sugar and zero calorie sodas, and diversified into teas, juices, energy drinks, and bottled water. It also took a major stake in Monster Beverage in 2014.

Which company is growing faster?

PMI's revenues, excluding excise taxes, fell 0.4% to $26.7 billion in 2016. But excluding currency impacts, its revenue rose 4.4%, fueled by solid sales growth across all its regions.

PMI's total cigarette volume slipped 4.4% annually, but the company offset that decline with price hikes and better cost controls -- which lifted its adjusted EPS by 35.8% for the year. Excluding currency impacts, its earnings would have risen 51.9%. Looking ahead, analysts expect PMI's revenue (excluding excise taxes) and adjusted earnings to respectively grow 7% and 6% this year.

Coca-Cola's revenue and earnings respectively fell 5% and 10% last year due to soft soda demand, currency headwinds, tough competition in the beverage market, and the ongoing refranchising of its bottling operations. Coca-Cola is trying to offset that soft demand with price hikes, but it arguably doesn't have the pricing power of tobacco companies like PMI.

Analysts expect Coca-Cola's troubles to continue with a 16% sales decline this year. Its earnings, which are already supported by buybacks, are expected to stay roughly flat.

Dividends and valuations

Many investors own PMI and Coca-Cola for their dividends. PMI, which has hiked its dividend every year since its split with Altria, pays a forward yield of 4%. Coca-Cola pays a forward yield of 3.3%, and has raised its payout annually for over five decades.

Over the past 12 months, PMI spent 92% of its earnings and 97% of its free cash flow on dividends. During that same period, Coca-Cola's dividend consumed 136% of its earnings and 101% of its free cash flow -- indicating that its dividend is on much shakier ground than PMI's.

PMI trades at 24 times trailing earnings, which is higher than the industry average of 14 for tobacco companies. Coca-Cola has a trailing P/E of 44, compared to the industry average of 31 for soft drink makers. PMI's forward P/E of 20 is also lower than Coca-Cola's ratio of 23.

The winner: Philip Morris International

Coca-Cola might have fared better over the past year, but I'm sticking by my original call that PMI is the better long-term buy. PMI has stronger growth rates, a higher and healthier dividend, and lower valuations.

Coca-Cola is a low-risk stock, but the company's anemic growth, high payout ratios, and lofty valuations all make it a weak investment. Moreover, rising interest rates -- which would make bonds more attractive than income stocks -- could cause big sell-offs in flawed dividend stocks like Coca-Cola.


Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool has a disclosure policy.