Thanks to a pair of February earnings updates, investors have some fresh data about operating trends for both Coca-Cola (KO) and PepsiCo (PEP -0.62%). These two dividend stock favorites showed off why investors gravitate toward their stellar businesses. Each grew sales through a tough selling environment while demonstrating pricing power on the way to higher profit margins.
Their trajectories are different, though, and so are the premiums that investors are being asked to pay for these two businesses.
With that in mind, let's look at which stock is the better buy right now.
Coke's growth
Coke easily wins the growth matchup. The beverage titan reported a 12% organic sales boost for 2023 while Pepsi's growth was less than 10%. Coke benefited from the fact that a high proportion of its sales are in the on-the-go niche -- places like restaurants and sporting events -- which shoppers are prioritizing in the wake of the pandemic.
Pepsi still managed to increase sales on top of big gains a year ago. However, its growth came entirely from rising prices. Volumes were down 2% in the food division and slipped 1% in the beverage segment. In contrast, Coke demonstrated more pricing power, with prices and volumes rising throughout 2023.
Margins and cash
Pepsi did a good job improving its profit margin in 2023 thanks to a combination of rising prices and cost cuts. Core earnings jumped 14% for the year compared to its 9.5% organic sales increase.
Yet Coke is the stronger business in this area, too. The beverage giant has some financial advantages that Pepsi lacks, including its focus on profitable drink sales, its massive global sales footprint, and its highly efficient selling infrastructure. These factors help explain why Coke's profit margin is sitting at 30% of sales, or roughly double PepsiCo's result.
You'll get plenty of cash returns from holding Coke in your portfolio as well. The company paid $8 billion in dividends last year and spent nearly $2 billion on stock buybacks. That's another way that shareholders can enjoy strong overall returns by holding the leading beverage giant.
Outlook and prices
Pepsi is the cheaper stock, but investors might still prefer paying the premium for Coke over its less expensive rival. Sure, you can own Pepsi for 2.5 times sales, or less than half of Coke's price-to-sales (P/S) ratio of 5.6. You'll get roughly the same 3% dividend yield in either case.
Coke stock doesn't just deliver the operating and financial wins outlined above, though. Its outlook also reflects stronger growth potential in 2024 and beyond. Specifically, Coke executives said in early February that organic sales will rise between 6% and 7% this year thanks to solid demand for its core beverages and for relatively new additions to the portfolio, such as sparkling waters and energy drinks.
Pepsi, on the other hand, sees sales climbing by just 4% this year thanks to weak demand. "Category growth rates are normalizing as consumer behaviors largely revert to pre-pandemic norms," CEO Ramon LaGuarta told investors recently.
Both companies are being impacted by these pressures, although Pepsi is taking a bigger hit. Given their similar dividend yields, along with Coke's stronger cash flow and earnings power, the industry leader seems like the better buy now. That's true even if you'll have to pay a modest premium to own this high-performing consumer staples business.
