The consumer staples sector is known for being fairly resilient throughout the economic cycle. Coca-Cola (KO) and Procter & Gamble (PG -0.78%) are two of the largest and best-known companies in the sector, and investors probably wouldn't be making a mistake if they owned shares of either of them.
But which of these two stocks would make the better choice to buy right now?
Similarities and differences
It shouldn't come as a surprise to anyone that Coca-Cola makes soda and other drink products. Its modestly priced offerings get purchased on a regular basis by generally brand-loyal customers. Although they are not actually necessities -- people could just drink tap water -- their fairly low prices aren't usually enough to break household budgets, and consumers tend to buy Coca-Cola's products fairly steadily throughout the economic cycle.
Image source: Getty Images.
Procter & Gamble, meanwhile, has a much broader array of products, including cleaning supplies, baby care, feminine care, healthcare, and paper goods. These are far more necessity-oriented areas, so its business is, perhaps, a touch more resilient in down periods. But P&G, as it is more commonly known, tends to operate at the high end of the categories it operates in. Customers are loyal, but there's always a risk that people will trade down during hard times.
Overall, however, both of these consumer staples companies have strong and resilient businesses. They also tend to have decent pricing power, with the ability to raise prices over time to support top-line growth. Acquisitions (a common theme for Coca-Cola) and product development (a favorite for P&G) also help the companies grow their businesses. Although they haven't risen in smooth lines, their revenues and earnings have generally trended higher over time.
KO Revenue (Annual) data by YCharts.
They are both good companies, and their management teams place a high value on rewarding investors via dividends. Procter & Gamble and Coca-Cola are each Dividend Kings with track records of more than six decades of annual dividend increases. At their current share prices, Coca-Cola's dividend yield is around 3.1%, while P&G's yield is roughly 2.4%. This is where things start to separate out.
Coca-Cola looks more attractively priced
To paraphrase Benjamin Graham, the value investing icon who helped to train Warren Buffett, even a great company can be a bad investment if you pay too much for it. That applies notably to this specific stock comparison.
P&G's price-to-sales ratio is currently around 4.6 times versus its five-year average of roughly 4.5 times. That compares to Coca-Cola's current price-to-sales ratio of 5.7 times versus its longer-term average of 6.4 times. When it comes to the top line, Coca-Cola stock clearly looks less expensive.
With regard to their price-to-earnings (P/E) ratios, P&G sports a ratio of 26 compared to its five-year average of 35. But that average should be taken with a grain of salt because of an extreme outlier in the mix: In 2019, its P/E ratio was 75. Meanwhile, Coca-Cola's P/E is roughly 24 versus an average of 31. But again, there's an outlier going into the average. The soda giant had a P/E ratio of nearly 65 in 2018. Still, if you compare their current P/E ratios, Coca-Cola looks cheaper.
Price-to-book (P/B) value, which considers a company's balance sheet, continues the broad trend. Procter & Gamble's P/B ratio is currently 7.8 compared to a five-year average of 6.9. Coca-Cola's P/B ratio is 9.7 compared to a longer-term average of about 11.5. It looks historically cheap, while P&G looks historically expensive.
With a higher yield and what looks like a cheaper valuation relative to historic levels, investors comparing Coca-Cola and P&G today will probably find the drink maker a more attractive alternative.
Both are great companies
If you already own P&G stock, selling it now to buy shares of Coca-Cola probably isn't a great call. It is a good company and one that you'll likely want to own for a long time. But if you are trying to decide between Coca-Cola and P&G as new investments, the answer is fairly clear. Value-conscious investors will definitely find the flavor of Coke more appealing in this valuation taste test.
