The beverage industry is fertile ground for dividend investors. Titans such as Anheuser-Busch InBev (BUD -1.19%) and PepsiCo (PEP 0.56%) have long provided bountiful streams of dividend income to their shareholders. With the beer king and soda giant currently yielding 4.8% and 3.5%, respectively, that remains true today.
But which of these dividend stalwarts is the best buy now? Let's find out.
Image source: Getty Images.
Competitive position
Their vast global distribution networks provide both Anheuser-Busch InBev and Pepsi with powerful competitive advantages. Their strong relationships with retailers of all sizes in most areas of the world make it extremely difficult for smaller rivals to gain market share.
They also enjoy tremendous brand recognition. AB InBev's brands include some of the world's best-selling beers such as Budweiser, Corona, Stella Artois, Beck's, Foster's, and Michelob Ultra. Pepsi, meanwhile, owns leading market share positions in major global beverage categories including soda, juice, sports drinks, and bottled water with brands such as Pepsi, Mountain Dew, Tropicana, Gatorade, and Aquafina.
In addition to its powerful beverage empire, Pepsi also commands a dominant share of the global snack market. In fact, as my colleague Asit Sharma has noted, Pepsi owns the top seven brands in the salty-snacks category, as well as leading brands in many other snack segments. Combined with its broad beverage lineup, this gives Pepsi greater revenue diversification than AB In-Bev. For this reason, I'd argue that Pepsi has the stronger competitive position.
Advantage: Pepsi
Financial fortitude
Here's how Pepsi and AB InBev stack up with regard to financial strength when based on the following key metrics:
| Metric | PepsiCo | AB InBev |
|---|---|---|
| Revenue | $64.66 billion | $56.43 billion |
| Operating income | $10.48 billion | $17.93 billion |
| Operating cash flow | $8.64 billion | $14.63 billion |
| Free cash flow | $5.57 billion | $9.49 billion |
| Cash | $13.90 billion | $7.97 billion |
| Debt | $35.12 billion | $117.83 billion |
Data sources: Morningstar, Yahoo! Finance.
Pepsi generates about 15% more revenue than AB In-Bev, but the latter is the more profitable business, with operating margins of nearly 32% compared to only 16% for Pepsi. In turn, the beer king produced about 70% more operating and free cash flow over the past year.
AB InBev, though, is also the far more heavily debt-laden company, with $110 billion in net debt compared to $21 billion for Pepsi. Pepsi, therefore, is the more financially sound business.
Advantage: Pepsi
Growth
Although Pepsi has the stronger balance sheet, AB In-Bev is expected to grow its profits at a faster rate. Wall Street forecasts that AB InBev will increase its earnings per share at 9.3% annually over the next five years, fueled by its margin-expanding "premiumization" initiatives -- which are boosting sales of its higher-priced brands -- and additional cost savings related to its merger with SABMiller. Meanwhile, Pepsi's EPS is projected to rise by less than 7% annually during this same period, driven mostly by the continued growth of its Frito-Lay snacks business.
A slightly more than 2% difference in projected EPS growth isn't much, but it's enough to give the edge to Anheuser-Busch here.
Advantage: Anheuser-Busch InBev
Valuation
Finally, let's take a look at the following stock valuation metrics for these two beverage giants, including price-to-free cash flow, price-to-earnings, and price-to-earnings-to-growth (PEG) ratios.
|
Metric |
PepsiCo |
AB InBev |
|---|---|---|
|
P/FCF |
27.40 |
17.91 |
|
Forward P/E |
18.11 |
17.25 |
|
PEG |
2.75 |
2.12 |
Data source: Yahoo! Finance.
On all three metrics, AB In-Bev's stock is considerably less expensive than Pepsi's.
The former's stock is about 35% cheaper in terms of price to free cash flow, which is an important valuation metric for dividend investors, as it's ultimately the amount of cash these companies have remaining after expenses and capital expenditures that determines how much dividends they can pay to shareholders.
AB InBev's shares are also about 5% less expensive on a forward price-to-earnings basis -- which is a measure of how much investors are paying for each dollar of earnings these businesses are expected to generate in the next year -- and 23% cheaper on a price-to-earnings-to-growth basis, which factors in AB InBev's higher projected EPS growth.
Thus, the beer king is currently the better bargain.
Advantage: Anheuser-Busch InBev
The better buy is...
With this better-buy showdown all tied up after four rounds, I'm going to call it a draw. PepsiCo's diverse revenue streams and financial strength make it a low-risk way to earn hefty soda- and snack-fueled dividends in the years ahead. On the other hand, AB InBev's earnings growth prospects and compelling valuation also make it an intriguing high-yield stock. So if you're an income-seeking investor, rather than choose between these two high-quality dividend stocks, your best move may be to simply buy both PepsiCo and Anheuser-Busch InBev today.
