PepsiCo (PEP -0.62%) and McCormick (MKC 0.23%) both recently closed out their fiscal years (2022 in this case) and each offered investors a detailed outlook for the year ahead. Management at these two consumer-packaged food giants offered up plans for steady growth, rising profitability, and increasing cash returns through dividends.
Both companies expect gains in the coming year, but which one is the better fit for your portfolio today? Let's dive right in and see if an answer arises.
PepsiCo is growing
PepsiCo is the clear winner in the sales growth category. The company's wide portfolio allowed it to avoid a big decline during the earliest phases of the pandemic, and revenue growth has been fantastic since then. Organic sales were up a blistering 14% in 2022 after having risen by 10% in the previous year.
McCormick, in contrast, posted just a 3% sales uptick in 2022. Yes, this slowdown was influenced by short-term issues like supply chain problems. But PepsiCo is still the choice for investors seeking steadily rising sales. Both companies are projecting roughly 6% higher sales in 2023, although PepsiCo's boost is coming on top of two consecutive banner growth years.
Profits and cash
McCormick remains the more profitable business thanks to its focus on high-margin niches like sauces and condiments. Yet the gap between these two metrics is closing. PepsiCo's operating margin was 13.3% of sales last year compared to McCormick's 14.4% rate.
Both companies are likely to see gains here in 2023 even though sales growth will be constrained by weaker consumer spending. That's because they each raised prices significantly in 2022 and have slashed costs as well. These moves pressured sales volumes, but they are laying the groundwork for bigger earnings spikes ahead. The outlook here is roughly equal between the two stocks, as both businesses aim to boost operating earnings by 10% in 2023.
Price and value
Both stocks have underperformed the S&P 500 since early 2020, potentially setting prospective investors up for better returns from here. But PepsiCo has the more attractive valuation. You can buy the stock for just 2.8 times sales compared to McCormick's price-to-sales ratio of 3.1.
MKC PS Ratio data by YCharts
Sure, McCormick's higher earnings power supports a more premium valuation. But PepsiCo has a clearer shot toward expanding its profit margin in 2023. The company is also more generous with direct cash returns.
After raising its dividend by 10% this year (compared to McCormick's 5% boost), PepsiCo is planning to send nearly $8 billion to investors through that payout as well as through significant stock buybacks. McCormick's repurchase spending is still constrained today as it pays down the debt it took on to fund a few big acquisitions.
Both stocks are likely to deliver market-beating returns for investors willing to hold through the volitility of the next few quarters. Both companies have raised dividends annually for multiple decades (51 years for PepsiCo and 37 for McCormick). That level of consistency is only possible in a business with enduring competitive advantages.
Still, thanks to its lower valuation and more impressive financial results heading into 2023, PepsiCo looks like the more attractive stock today. Consider adding it to your watchlist or your portfolio.
