Judging by their stock performance, PepsiCo (PEP -0.39%) and Coca-Cola (KO -0.76%) seem like their businesses are moving in opposite directions. Shares of PepsiCo have fallen 29% from their high and are trading near a 52-week low, while Coca-Cola is up 28% year to date and sitting near new all-time highs.
Coca-Cola is clearly executing better right now, but PepsiCo is still growing volumes, revenue, and earnings. That's why the sell-off looks less like a red flag and more like a potential opportunity, especially for dividend investors.
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Why Coca-Cola is up, and PepsiCo down
Many consumer goods companies are reporting softer demand as higher gas prices pressure household budgets. Coca-Cola has largely shrugged that off, delivering 6% year-over-year organic revenue growth last quarter, with unit case volume up a solid 5%. Better still, adjusted earnings per share climbed 11% year over year.
PepsiCo also grew organic revenue 2.4% over the year-ago quarter, slower than Coca-Cola's pace. Moreover, adjusted earnings rose just 1% and came in below Wall Street estimates, which helps explain why investors have been harder on the stock.
The difference in business models matters, too. Coca-Cola is a simpler, beverage-focused company, while PepsiCo splits its portfolio between beverages and snack foods. That structure can be a strength at times, but it also tends to produce lower margins.
NYSE: KO
Key Data Points
In the second quarter, Coca-Cola posted a 35% operating margin, while PepsiCo delivered 16.5%. In a choppy macroeconomic environment, investors are rewarding Coke because of its stronger sales and margins.
Why PepsiCo still looks like the better buy
Coca-Cola trades at a forward price-to-earnings (P/E) multiple of 27, which appears to be a fair assessment of its brand value and financial performance. PepsiCo, however, trades at a modest 16 times forward earnings estimates -- a valuation that may be pricing in too much pessimism.
Importantly, PepsiCo is still growing. Global food volume rose 3% in the second quarter, and beverage volumes increased 2%. That's below Coca-Cola's 5% volume growth, but it's meaningful growth for PepsiCo when it's trading at a much lower forward P/E.
NASDAQ: PEP
Key Data Points
Management also expects PepsiCo's North American business to improve from here -- just at a slower pace than it previously thought. PepsiCo still has a wide competitive moat based on strong brands, such as Gatorade, Quaker Oats, and Doritos, among others, and a global distribution system. Over time, investors can expect a business with these assets to compound in value.
Meanwhile, shareholders are getting paid to wait. PepsiCo has a long history of dividend growth and just raised its quarterly payout by 4% to $1.48 per share, putting the forward yield at 4.2% -- nearly twice Coca-Cola's 2.35% forward yield.
That dividend is backed by cash generation. PepsiCo produced $9.3 billion in free cash flow over the past 12 months and paid $7.8 billion in dividends.
Coca-Cola has earned its rerating. But at today's prices, PepsiCo looks like the better value.
