I believe one of these two has a clearer path to long-term profit growth.
The Coca-Cola Company (KO -0.46%)gets no shortage of attention from investors. It's been publicly traded for more than 100 years and has created many millionaires along the way. Moreover, it counts famed investor Warren Buffett among its fans, which goes a long way in boosting investor sentiment.
However, I'd buy shares of PepsiCo (PEP -0.50%) today if I were forced to choose between it and Coca-Cola. Don't get me wrong: I often drink co*ke products and have loved the iconic branding since I was young.
But Pepsi has something that co*ke doesn't and it makes all the difference for me when thinking about these two companies as an investor, not a consumer.
But first, here's how Pepsi and co*ke are alike
Both Pepsi and Coca-Cola are Dividend Kings, meaning that each has paid and increased the dividend annually for at least 50 years.
With dividend stocks, two important metrics are the dividend yield and the dividend payout ratio. The dividend yield tells investors how much annual dividend income they can expect relative to their investment -- a 1% yield gives $1 per $100 invested.
But dividends aren't guaranteed; companies can stop paying them if they don't have enough earnings. And that's why a payout ratio is important. A payout ratio shows how much of a company's earnings are being used for the dividend.
Pepsi and co*ke are extremely similar when it comes to the dividend yield and the payout ratio, as the chart below shows.
KO Dividend Yield data by YCharts
If one of these two companies had a better track record, a higher yield, or a lower payout ratio, then perhaps my opinion would be different. But Pepsi and Coca-Cola are very alike in these important metrics, which doesn't give either company an edge.
This is why I'm looking at something else when picking Pepsi stock over Coca-Cola stock today.
The simple reason I prefer Pepsi stock
When people think of Coca-Cola and Pepsi, they think of two behemoth beverage businesses. And in the case of Coca-Cola, this is true -- the company is a pure-play beverage company and one of the very best at what it does. However, Pepsi is a much more diverse business, which is why I prefer it over Coca-Cola.
In addition to beverages such as Pepsi, Mountain Dew, and Mug Root Beer, PepsiCo owns snacking brands with its Frito-Lay division and it also sells food items with its Quaker Oats segment.
Pepsi breaks out the numbers for Frito-Lay and Quaker Oats in North America. These business segments in this market accounted for nearly 31% of Pepsi's overall revenue in 2023. Moreover, they accounted for a whopping 60% of Pepsi's operating profit.
By having business operations in beverages, snacks, and foods, PepsiCo is a diverse business and that comes in handy. Investing is about taking a long-term perspective and many unforeseen things can happen with a business or the economy. But I'm fairly confident that Pepsi will perform better than some of its peers because if one part of its business slips, it has the other parts of the business to hold it steady.
It's more than just this: Pepsi's "other" businesses are also an important component of future profitable growth. In the company's earnings call to discuss financial results for the fourth quarter of 2023, CEO Ramon Laguarta pointed out that snacks have pushed its international operations to a $40 billion business annually. And this scale is important.
According to Laguarta, Pepsi's scale in international markets is leading to higher profits. And to him, this means that international growth is the company's "most remarkable and exciting opportunity." In short, more growth outside of the U.S. will lead to more economies of scale and better profits.
Therefore, between these two companies, I see a clearer path for Pepsi to grow its profits compared to Coca-Cola. And I believe that profit growth will give Pepsi a better opportunity to keep growing its dividend for many years as well as provide more upside potential for the stock.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
Yet income investors might see that trade-off as a good one to make for this beaten-down consumer staples stock. PepsiCo this year raised its dividend by 7% after boosting it by 10% in 2023. Its track record of over 50 consecutive annual hikes makes it a Dividend King, right along with peer Coca-Cola.
Is Pepsi a good buy right now? ›
PepsiCo has 6.08% upside potential, based on the analysts' average price target. PepsiCo has a conensus rating of Moderate Buy which is based on 8 buy ratings, 5 hold ratings and 0 sell ratings. The average price target for PepsiCo is $191.27.
What do experts say about the Coca-Cola stock? ›
Fair Value Estimate for Coca-Cola
With its 3-star rating, we believe co*ke's stock is fairly valued compared with our long-term fair value estimate of $60 per share, which implies a 22 times multiple against our adjusted 2024 earnings estimate and a 2024 enterprise value/adjusted EBITDA multiple of 20 times.
What is the correlation between Pepsi and Coca-Cola stocks? ›
Diversification Opportunities for PepsiCo and Coca Cola
The 3 months correlation between PepsiCo and Coca is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding PepsiCo and The Coca Cola in the same portfolio, assuming nothing else is changed.
Why did you choose PepsiCo? ›
PepsiCo is a renowned global leader in the food, beverage and snack industry, with a portfolio of iconic brands that have been around for generations. This position offers me the opportunity to work with one of the world's largest and most successful companies and to contribute to their success.
What are the advantages of Pepsi company? ›
PepsiCo's competitive advantage lies in its diverse portfolio encompassing beverages and snacks, setting it apart from competitors like Coca-Cola. This strategic approach allows PepsiCo to cater to a wider consumer base and leverage cross-promotional opportunities between its product categories.
What is the future of PepsiCo stock? ›
PepsiCo Stock Forecast
The 11 analysts with 12-month price forecasts for PepsiCo stock have an average target of 189.45, with a low estimate of 170 and a high estimate of 211. The average target predicts an increase of 4.70% from the current stock price of 180.94.
What sells better co*ke or Pepsi? ›
Since 2004, Coca-Cola Company has been the market leader, according to industry statistics. Pepsi ranks second, followed by Keurig Dr. Pepper.
What will Pepsi stock be worth in 5 years? ›
PepsiCo stock price stood at $182.09
According to the latest long-term forecast, PepsiCo price will hit $200 by the middle of 2026 and then $250 by the end of 2028. PepsiCo will rise to $300 within the year of 2030 and $350 in 2033.
Is Coca-Cola a good stock to buy today? ›
The highest analyst price target is $72.00 ,the lowest forecast is $58.00. The average price target represents 7.62% Increase from the current price of $63.1. Coca-Cola's analyst rating consensus is a Strong Buy. This is based on the ratings of 13 Wall Streets Analysts.
co*ke most likely feared the negative image the brand would receive if people were creating inappropriate cans. However, their caution caused many people's names to be rejected by the system.
Who owns most of Coca-Cola stock? ›
According to the latest TipRanks data, approximately 39.53% of the company's stock is held by institutional investors, 5.84% is held by insiders, and 37.94% is held by retail investors. Warren Buffett owns the most shares of Coca-Cola (KO).
Should you invest in co*ke or Pepsi? ›
Pepsi is the cheaper stock, but investors might still prefer paying the premium for co*ke over its less expensive rival. Sure, you can own Pepsi for 2.5 times sales, or less than half of co*ke's price-to-sales (P/S) ratio of 5.6. You'll get roughly the same 3% dividend yield in either case.
Why is Pepsi stock so good? ›
PepsiCo is also cash rich. The company has generated cash flow growth of 6.1%, and is expected to report cash flow expansion of 10.6% in 2024. PEP should be on investors' short lists because of its impressive growth fundamentals, a good Zacks Rank, and strong Growth and VGM Style Scores.
Why does Warren Buffett like Coca-Cola stock? ›
A trio of forever stocks
Buffett often groups Coca-Cola and American Express together. He praises their dominance and how they've carved out exceptional niches in their industries, with strong moats and leadership. Recently, he's added Apple to create a trio of favorite stocks, or as he would say, businesses.
Why do people choose Pepsi? ›
Pepsi is approximately 5% sweeter than Coca-Cola. That's why Pepsi tends to win the head-to-head taste-offs like the famous “Pepsi Challenge.” When offered a sip, people choose the sweeter drink. But when choosing a drink to enjoy with a meal or a snack, a majority of people choose Coca-Cola.
Why is PepsiCo supply chain so good? ›
PepsiCo's commitment to the efficient operation of equipment is a cornerstone of its success in supply chain management. PepsiCo has drastically improved its ability to control costs, increase productivity, and ensure quality control throughout its distribution network by optimizing available equipment.
Is Johnson & Johnson a good stock to buy? ›
Johnson & Johnson has a consensus rating of Moderate Buy which is based on 7 buy ratings, 7 hold ratings and 0 sell ratings. The average price target for Johnson & Johnson is $174.85. This is based on 14 Wall Streets Analysts 12-month price targets, issued in the past 3 months.
