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Better Buy: IBM vs. Coca-Cola

By Reuben Gregg Brewer - Mar 22, 2020 at 8:40AM

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Between these two business icons, is one a better buy as the world deals with the coronavirus pandemic?

It's hard to be an investor today, with the market in seeming free fall. However, that's often the best opportunity to buy great stocks on sale. In times like these that it pays to stick with proven survivors, like International Business Machines (IBM -2.48%) and Coca-Cola (KO -1.71%). Each has been in existence for over 100 years, they both have impressive dividend histories, and they each appear more attractive today than they have in awhile. But is one a better buy than the other?

1. COVID-19

The first question investors should be asking today is if the coronavirus, known as COVID-19, could do irreparable harm to IBM or Coke. The answer in both cases is highly likely to be no. Yes, demand for the drinks Coke sells could diminish in the near term as people around the world hunker down at home and spend all of their money on toilet paper instead of soda. But when this global event fades, demand for Coke, if it has faltered, should recover.

A street sign that reads where to invest

Image source: Getty Images

IBM, meanwhile, could actually see a long-term benefit from COVID-19 if the crisis pushes more companies into the cloud. The need to work from home has certainly proven that the types of technology this business-to-business focused company supports and sells are vital.

That said, both of these U.S. icons will likely see near-term hits to their businesses. However, that's not exactly unique -- a lot of companies are going to get hit by the worldwide efforts to quell the coronavirus outbreak. While investors are perhaps rightly reassessing valuations in the stock market, the long-term impact on Coke and IBM as businesses is unlikely to be material.

2. Financial strength

Although not on equal footing balance sheet-wise, both Coke and IBM are likely to survive. But that doesn't mean investors shouldn't consider the financial foundations here. There are a lot of different metrics that could be looked at, but it doesn't actually require that much effort to see the difference. Coke's financial debt to equity ratio is roughly 0.2 times, while IBM's ratio is roughly 0.5 times. Coca-Cola covers its interest expenses 31 times over, IBM covers its interest costs by a strong, but much less impressive, 11 times. 

It wouldn't be fair to characterize International Business Machines as being in dire financial shape -- that's just not true. And a notable portion of its debt is directly in support of selling its products, so corporate-level leverage isn't really as high as it seems. But, at the end of the day, Coke is the hands-down winner.

3. Valuation

The massive stock market drop that's taken place in 2020 has dragged most companies down with it. Coke, for example, is off around 25% from its highs this year. IBM has fallen nearly 35% from its 2020 peak. At least those were the numbers at the time of writing -- they can change dramatically day by day. These declines, meanwhile, have left both trading below their five-year averages for key valuation metrics like the price to sales and price to cash flow

That said, there's still a notable difference here. Coke's discount to its five-year average price to sales ratio is about 1%, while IBM is trading about 30% below its longer-term average on this metric. The same holds true for price to cash flow, where Coca-Cola is about 20% below the average, while IBM is roughly 25% below. There's an even bigger difference with the price to book value ratio, where Coke is trading about 10% above its average, while IBM is about 50% below. 

Earnings is likely to be misleading as a long-term indicator of value at this point because of the impact of the coronavirus, so it's probably best to pass on that valuation metric for a bit. That said, there's a trend here that is hard to ignore: IBM looks cheaper. If you are a die-hard value investor, the edge goes to IBM. If you are a growth-at-a-reasonable-price type, though, Coke might still look like the better option.

4. Speaking of growth...

IBM has very openly been going through a long and difficult transition, as it works to update its product and services lineup to better serve the current needs of its customers. It has been selling off business lines like computer production, and shifting toward cloud computing, artificial intelligence, security, and quantum computing. At this point, its new ventures make up around half of revenue, so it looks like it may be at an inflection point. Still, business growth has not been the story here for some time. 

IBM Revenue (Annual) Chart

IBM Revenue (Annual) data by YCharts

Coca-Cola has been grappling with shifting consumer tastes, too, as soda sales have weakened and other products, like water and energy drinks, have seen demand increase. It even took the drastic step of buying a coffee company that owns physical retail locations. This, however, is really just par for the course for a consumer-facing company like Coke. Generally speaking, it has been able to grow revenue and earnings in the low-single-digits over time. Still, that slow and steady growth is better than what investors have seen from IBM lately. 

5. Dividends

Coke wins hands-down when it comes to longevity, with 57 consecutive annual dividend hikes under its belt. The average increase of late has been in the low- to mid-single digits, but it has clearly proven its dedication to returning value to investors through regular cash payments. The yield is around 3.5% and its payout ratio is around 75% (a little high, but not too troubling given that the nature of its business is, basically, to sell lots of small products to lots of different customers). 

IBM's yield is a whopping 6%, which gives it a clear edge for dividend investors looking to use this market downturn to increase the income their portfolios generate. And with over 20 years of annual dividend hikes behind it, it's not exactly letting investors down on the dividend front. The payout ratio is around 60%. The average increase of late has been in the mid-single-digit space. All in all, it's hard to call a winner here on this one. 

Which is better?

Picking between Coke and IBM really comes down to safety. Although neither company is likely to go out of business because of COVID-19, Coke entered this downturn in better financial shape. It's not exactly a steal at current prices, but paying a fair price for a well run company isn't the worst thing in the world.

Buying IBM requires a little more faith. Yes, the yield is higher, it looks cheaper valuation-wise, and it appears strong enough to weather the hit from the spreading coronavirus. But it is still in the process of a major business overhaul, and its leverage is higher than that of Coca-Cola. For those with a safety-first mentality, Coca-Cola probably has the edge here. Investors willing to take on a bit more risk to up the income they get from their investments, however, might find IBM preferable.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$137.62 (-2.48%) $-3.50
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$63.28 (-1.71%) $-1.10

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