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Better Buy: Starbucks Corporation vs. Coca-Cola

By Dan Caplinger - Apr 4, 2016 at 10:08AM

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Which of these two beverage giants deserves more of your attention?

Image source: Starbucks.

What the world drinks has changed over time, and beverage companies have had to change with the times in order to stay competitive. For decades, Coca-Cola (NYSE: KO) gave the world the sugary carbonated soft drinks that they wanted, making itself ubiquitous not just through traditional distribution methods like grocery stores but also as accompaniments throughout the restaurant industry. By contrast, coffeehouses that have been popular in Europe for centuries were slow in coming to the U.S., and it took pioneering coffee giant Starbucks (Nasdaq: SBUX) to make its cafes as universally available as Coca-Cola's beverages. With trends moving away from carbonated beverages, Coca-Cola has had to work at expanding beyond its traditional roots even as Starbucks takes full advantage. Investors looking at the industry want to know which stock is the better buy right now. Let's look at how Starbucks and Coca-Cola compare on some key metrics to see which one might be a smarter pick for investors.

Starbucks and Coca-Cola have both done quite well over the past year, although Starbucks has had the upper hand. The coffee specialist is up 31% since April 2015, while Coca-Cola has risen a quite respectable 19%.

It's reasonable to expect that a bigger rise in one company's stock could lead to its potentially being overvalued compared to a more modest performer, and that's generally the case here when you compare the two companies on simple valuation metrics. Starbucks currently trades at 37 times trailing earnings, compared to Coca-Cola's trailing earnings multiple of 28. Both of those figures are relatively high compared to the market, but they also emphasize the value that the market is placing both on stocks with long track records of success and those that have interesting growth prospects.

A look at forward earnings multiples makes both stocks look less expensive, but Coca-Cola remains the cheaper play. Coca-Cola trades at 23 times forward earnings, compared to 28 for Starbucks. From a valuation standpoint, both stocks are on the pricey side, but Coca-Cola has the edge.

The advantage that Coca-Cola has over Starbucks in the dividend realm is clearer. With a dividend yield of 3%, Coca-Cola pays out more than double the 1.3% yield that Starbucks shareholders receive.

However, in some ways, that merely represents the different stages of their corporate existence both companies are in right now. Coca-Cola pays out about 80% of its earnings in dividends, which is fairly common for mature companies that have already capitalized on most of their high-growth opportunities. Moreover, Coca-Cola has prioritized dividends as part of its value proposition to shareholders, and it has boosted its annual dividend for 54 straight years in an effort to stand out from even the elite of the dividend-stock world.

Starbucks, on other hand, pays out just 40% or so of its earnings in the form of dividends. The company has worked at building a more promising track record on the dividend front, having quadrupled its quarterly payout during a five-year period. However, despite the progress that Starbucks has made, Coca-Cola still gives dividend investors more of what they want to see.

The great equalizer for Starbucks in its comparison with Coca-Cola comes from potential future growth. Investors in Starbucks have high expectations for the coffee giant, believing that it can grow at an annual rate of about 18% between now and 2021. In its fiscal first quarter, Starbucks saw its comparable sales rise 8% both in the Americas and worldwide. The company continues to become a landmark across the globe, opening stores at a record pace of more than 500 in just the last quarter alone. With 1,800 new stores to come and further efforts to put Starbucks products in front of consumers through distribution channels in grocery stores and other areas, the coffee giant has huge growth prospects that in many investors' eyes justify its valuation.

Coca-Cola, on the other hand, has faced struggles because of falling demand for the carbonated beverages that bear its name. Moves into water, tea, juice, energy drinks, and coffee-related products reflects the multifaceted aspects of Coca-Cola's overall strategy. Yet investors expect minimal growth of just 2% or so annually over the next five years.

Starbucks and Coca-Cola are two very different stocks, and so it's far from easy to compare them. Despite its higher valuation and lower dividends, Starbucks has much stronger growth prospects than Coca-Cola right now. For those who can deal with the arguably greater volatility, those growth opportunities make Starbucks a better buy than the soft-drink stalwart at current levels.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
$62.86 (3.08%) $1.88
Starbucks Corporation Stock Quote
Starbucks Corporation
$73.42 (0.04%) $0.03

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