The battle between PepsiCo (PEP -0.62%) and Coca-Cola (KO) has persisted for decades. The so-called "cola wars" have often influenced the beverage landscape as each company fought (through marketing) in more than 200 countries to build and expand its fan base.
And the competition between these two companies goes well beyond cola. Each owns numerous beverage brands, and PepsiCo also mixes in some popular snack food brands. But does that make it a better choice for today's investors? Let's take a closer look.
The case for PepsiCo
Today's PepsiCo is better described as a consumer conglomerate rather than a seller of cola drinks. Its beverages include familiar brands such as Aquafina, Gatorade, and Tropicana. With food, its ownership of Quaker Foods and Frito-Lay places Quaker Oats, Lay's, Doritos, and numerous other foods under its umbrella.
It is also a significant player in branding, with partnership agreements that include companies like Starbucks and Papa John's.
In the first three quarters of 2023, these products and branding deals helped it earn $64 billion in revenue, a 9% increase from the same period one year ago. That led to net income of almost $7.8 billion, which fell 7% from year-ago levels.
However, last year's earnings included a $3.3 billion gain on the sale of assets, offset by a $1.6 billion impairment on intangible assets. If not for those one-time occurrences, net income would have risen by 16% during the period.
Investors nonetheless punished the stock, and it fell slightly over the last year. But while its price-to-earnings (P/E) ratio of 28 might appear high historically, the 21 forward P/E ratio is closer to historical lows, which could signal improving profit growth.
Lastly, investors should take note of the dividend, which has achieved Dividend King status after 51 years of increases. At $5.06 per share annually and a dividend yield of 3%, it is more than double the S&P 500 average of 1.4%. That rising stream of stable cash flow serves as a bonus for owning this stock.
Why investors should consider Coca-Cola stock
Coca-Cola might have its archrival beat on the dividend front. Its streak of annual increases is up to 61 and its payout of $1.84 per share yields 3.1%. Also, one longtime beneficiary of this payout is Warren Buffett's Berkshire Hathaway. Its 9% stake in Coca-Cola amounts to 400 million shares, which paid Buffett's company $736 million in dividends in 2023, a 57% annual return on the original $1.3 billion investment.
New investors are unlikely to derive such returns from the beverage stock. Nor are they going to find foods in Coca-Cola's portfolio. Nonetheless, in addition to its flagship cola beverage, it owns about 200 master beverage brands. Among its better-known brands are Minute Maid, Topo Chico, Gold Peak, and Powerade.
In the first three quarters of 2023, these brands helped drive $35 billion in revenue, a 6% yearly gain. That led to $8.7 billion in net income during the period, a 16% gain from year-ago levels -- the same percentage of PepsiCo's growth when excluding one-time charges.
Also, like PepsiCo, Coca-Cola's stock experienced little net movement over the last year. And its P/E ratio of 24 is lower than its peer. However, when looking at forward P/Es, the forward multiple of 21 compares closely to PepsiCo, meaning the valuation differential might not be as much as the current P/E ratio implies.
Should I buy PepsiCo or Coca-Cola stock?
The differences between PepsiCo and Coca-Cola are tiny. Both are diverse, well-established beverage stocks in a solid position to continue serving customers, meaning they should maintain steady dividends and stock growth. If someone is invested heavily in one of these stocks, the difference may not justify selling it and buying the other.
However, if choosing one, PepsiCo might have a slight edge. The expected increase in profits implied by the lower forward P/E ratio could give it a growth advantage for now, making it a better buy under current conditions.
