Philip Morris International (NYSE:PM) and Coca-Cola (NYSE:KO) own some of the world's most iconic consumer staples brands. PMI's Marlboro is the most popular cigarette brand in the world, and Coca-Cola's namesake drink is the most popular soda.

But over the past 12 months, Coca-Cola's stock has stayed flat, while PMI's stock tumbled more than 30%. Both stocks underperformed the S&P 500's 14% rally, but investors clearly thought Coca-Cola was a better investment.

Two glasses of cola.

Image source: Getty Images.

I compared these two stocks last December, and thought that PMI's stronger growth rate, higher dividend, and lower valuation made it the better buy. I was clearly wrong, since I overestimated PMI's ability to deal with lower cigarette shipments and fresh regulatory headwinds. Let's take a second look at both stocks.

Understanding PMI and Coca-Cola

PMI's cigarette portfolio includes brands like Marlboro, L&M, Chesterfield, Philip Morris, Sampoerna A, and Parliament. It also sells iQOS "heated cigarette" devices, which heat instead of burn a "tobacco stick" to release vapor instead of smoke. PMI was spun off from Altria (NYSE:MO) in 2008 to become a fully overseas company, while Altria retained the tobacco giant's domestic operations.

PMI focuses on expanding in developing countries with high smoking rates and lax regulations. That strategy has hit speed bumps in recent years as countries started introducing more anti-smoking regulations. PMI also constantly raises its cigarette prices to offset lower shipments and boost its earnings growth. However, the rising dollar, excise taxes, and British American Tobacco's takeover of Reynolds American have become major headwinds.

Coca-Cola mostly sells concentrated syrup to bottlers. It retains investments in many of its bottlers -- which operate as separate companies -- via its Bottling Investments Group. Aside from its namesake brand, its beverage brands include Sprite, Fanta, Fresca, Minute Maid, Dasani, Powerade, Fuze, and Simply Beverages.

To counter the ongoing decline of soda consumption in many top markets, Coca-Cola has introduced more reduced-sugar and zero-calorie sodas and launched more teas, juices, energy drinks, and bottled water. It also owns a major stake in Monster Beverage. Like PMI, Coca-Cola remains vulnerable to a strong dollar, and soda taxes in several markets could throttle its growth.

How fast are PMI and Coca-Cola growing?

PMI's total cigarette and heated tobacco unit shipments fell 3% in 2017, and its international market share (excluding the U.S. and China) dipped 10 basis points to 28%. Yet its revenue, excluding excise taxes, rose 8% to $28.7 billion. On a constant currency basis, revenue would have risen 9%.

This tells us that PMI offset the slump in shipments with price hikes. On the bottom line, PMI's diluted earnings per share fell 13% to $3.88 due to tax reform charges. Excluding those charges and currency impacts, adjusted EPS rose 10% to $4.93. 

A young man smokes a cigarette.

Image source: Getty Images.

Wall Street expects PMI's adjusted revenue and earnings to rise 8% and 9%, respectively, this year. Unlike its former parent Altria, PMI hasn't repurchased stock in recent quarters due to volatile currency headwinds.

Coca-Cola's total unit case volume remained flat in 2017, but its revenue fell 15% -- mainly due to ongoing refranchising efforts in its bottling territories. Organic revenue, which excludes the bottling impacts and currency headwinds, rose 3%. Coca-Cola also gained market share in the total non-alcoholic ready-to-drink market for the full year.

Coca-Cola's adjusted earnings per share -- which excludes one-time charges, divested businesses, and currency impacts -- stayed flat at $1.91 last year. Adjusted EPS would have declined if Coca-Cola hadn't repurchased $2 billion in shares during the year. Analysts expect Coca-Cola's reported revenue to fall 11% this year, but the company expects its organic revenue to rise 4% and adjusted EPS to increase 8% to 10%.

The dividends and valuations

PMI and Coca-Cola are both solid income stocks. PMI pays a forward dividend yield of 5.5%, and it's raised that payout every year since its split with Altria. Coca-Cola pays a lower forward yield of 3.5%, but it's raised that payout annually for over five decades.

At $82, PMI trades at about 16 times this year's earnings. At $45, Coca-Cola trades at 22 times this year's earnings. Investors are paying a higher premium for Coca-Cola because it has a better diversified portfolio (including "healthier" drinks) and faces fewer regulatory headwinds than PMI. However, Coca-Cola's multiple seems high relative to other stocks with superior earnings growth potential.

The winner: Coca-Cola

I'm not eager to buy either stock, but Coca-Cola is a safer long-term bet. PMI still has a solid business, but it faces a global slowdown in cigarette demand, tougher regulators, and a stronger dollar. Its dividend looks tempting, but it simply isn't worth the pain that those headwinds could cause.