Investors looking at these two beverage giants should probably err on the side of value, which means that No. 2 is No. 1 right now.
Coca-Cola (KO) and PepsiCo (PEP -0.11%) compete head-to-head in the beverage space, with their iconic, namesake brands. Unfortunately for PepsiCo, Coca-Cola is the winner of that battle of the beverages, with the Pepsi brand having now fallen all the way to No. 3, trailing just slightly behind Keurig Dr. Pepper’s namesake Dr. Pepper.
But don’t count PepsiCo out as an also-ran. Here’s why the No. 2 company in beverages (and No. 3 in cola) is the No. 1 stock between the two soda icons for you to buy right now.
Coca-Cola and PepsiCo are not interchangeable businesses
Coca-Cola makes sodas and other drinks. PepsiCo makes soda and other drinks. These two companies compete directly in the beverage space across a very large number of different sub-categories. For example, water, sports drinks, iced teas, and cold coffee are all beverage niches where both companies have strong contenders battling for industry dominance. Coca-Cola wins in some (like cola) and PepsiCo wins in others (notably sports drinks). But, overall, Coca-Cola is the stronger beverage maker.
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It’s lucky for PepsiCo that beverages are just one slice of the company’s business, especially since the Pepsi brand has fallen to No. 3 behind Dr. Pepper. Indeed, PepsiCo also happens to be the largest salty snack maker in the world via its Frito-Lay division. Coca-Cola just does drinks. In addition to Frito-Lay, PepsiCo also operates a packaged food business under its Quaker Oats division. Although Quaker Oats doesn’t have the same dominance in packaged food that the Frito-Lay or Pepsi businesses have, it adds diversification and further reach in the retail sector. All in, if you specifically want a non-alcoholic beverage company you’ll probably be more attracted to Coca-Cola. But if you want a diversified consumer staples company PepsiCo will likely win this match-up.
Coca-Cola and PepsiCo: An income and value comparison
Let’s assume that you would be happy owning either of these large and powerful businesses. Which one would be the better option right now? If you are a dividend investor, the answer is PepsiCo. For starters, Coca-Cola and Pepsico are both highly elite Dividend Kings, with each having racked up 50-plus years of annual dividend increases. Or, put another way, both are reliable dividend payers.
That said, if income is your goal, PepsiCo offers a dividend yield of 3.1% at the moment. Coca-Cola’s yield is 2.8%. Both are well above the skinny 1.2% you’d get from the S&P 500 index and even above the 2.5% of the average consumer staples stock, using Consumer Staples Select Sector SPDR ETF as a proxy. But here’s the really important math: The extra 30 basis points you would collect from PepsiCo would provide about 10% more income per year. That’s not a small difference if you are trying to live off the income your portfolio generates.
Then there’s valuation to consider. Coca-Cola’s price-to-sales (P/S), price-to-earnings (P/E), and price-to-book value (P/BV) ratios are all above their five-year averages. That suggests that Coca-Cola is a bit expensive today. PepsiCo, on the other hand, is trading with P/S and P/BV ratios that are below their five-year averages. The P/E ratio, meanwhile, is only a touch over the five-year average. This suggests that PepsiCo’s stock is fairly priced or a little cheap right now.
There’s a clear winner
Coca-Cola is a perfectly fine company. Even a good company. But when you match it up against PepsiCo as an investment, it comes in second place today. That doesn’t mean you should forget about it, as it would probably be wise to keep this Dividend King on your wish list (just in case investors throw this baby out with the bathwater during a bear market). However, if you have money to put to work today and you were thinking about a beverage company, PepsiCo is probably the better option. Sure, it is No. 2 in beverages, but it is No. 1 in salty snacks, giving it more diversification than Coca-Cola, and it has a more attractive dividend yield and valuation.
