Published March 4th, 2017 by Bob Ciura
Both Coca-Cola (KO) and PepsiCo (PEP) are legendary dividend stocks. They are each members of the Dividend Aristocrats, a group of 51 companies in the S&P 500 with 25+ years of consecutive dividend increases.
You can see the full Dividend Aristocrats List here.
PepsiCo has raised its dividend for years, while Coca-Cola’s streak is slightly longer. It has increased its dividend for years in a row.
In fact, Coca-Cola has reached an even more exclusive club.
With 55 years of dividend increases under its belt, it is a Dividend King—a select group of 19 stocks with 50+ years of consecutive dividend increases.
You can see the entire list of Dividend Kings here.
Coca-Cola and PepsiCo might seem like identical companies, since they dominate the global soda industry.
But they are more different than it seems. This article will discuss which of the two soda giants is the better dividend stock to buy today.
Business Overview
Winner: PepsiCo
PepsiCo and Coca-Cola have amassed enormous product portfolios, that are loaded with popular brands.
PepsiCo has 22 ‘billion-dollar brands’, which are brands that collect at least $1 billion in retail sales each year.
Source: Investor Relations
For its part, Coca-Cola has 20 brands that generate $1 billion or more in annual sales.
The difference between the two companies is that Coca-Cola’s portfolio is 100% comprised of beverages.
Source: 2017 CAGNY Presentation, page 15
Pepsi’s product portfolio is nearly 50-50 between food and beverages.
The current environment is more difficult for Coca-Cola than for PepsiCo, because soda consumption is dropping. Soda sales have fallen every year in the U.S. for the past 11 years.
Soda consumption is at a 30-year low. Consumers are taking a negative attitude towards soda, because of its calorie and sugar content.
This is problematic for Coca-Cola more than PepsiCo, because PepsiCo has a large food portfolio that includes Frito-Lay, Quaker, and several other snacks brands.
In 2016, Coca-Cola’s organic revenue—which excludes the impact of currency fluctuations—rose 3% from 2015.
Earnings-per-share, as adjusted for nonrecurring items, increased 5%.
PepsiCo’s snacks business has given it some shelter from the storms. Its organic revenue and adjusted earnings-per-share rose 3.7% and 9%, respectively, in 2016.
Both companies are fighting against a difficult foreign exchange environment, but PepsiCo’s organic results have been stronger than Coca-Cola’s in recent years.
Growth Prospects
Winner: PepsiCo
Both PepsiCo and Coca-Cola are preparing for the decline in soda consumption, but in slightly different ways.
Like Coca-Cola, PepsiCo is also focusing on water, juice, and tea—but it is building up its snacks business as well.
In addition to Frito-Lay, the company has added popular food brands that it labels “Good For You” such as Sabra, Stacy’s, and Naked.
PepsiCo considers new product development to be its biggest growth priority moving forward.
Source: 2017 CAGNY Presentation, page 3
Coca-Cola has aggressively invested in its stills portfolio, and the results are starting to bear fruit.
Source: Investor Overview Presentation, page 32
Coca-Cola has seen strong results from its stills portfolio. But the vast majority of Coca-Cola’s sales and profit continue to be derived from sparkling beverages, such as its flagship Coca-Cola, Diet Coke, Sprite, and Fanta sodas.
To be sure, Coca-Cola has an iron-clad grip on the soda industry. Its dominance in soda is indisputable.
Coca-Cola’s sparkling brands hold a greater than 50% global market share. And, Coca-Cola and Diet Coke are the top-two selling soda brands in the U.S.
This made Coca-Cola one of the most rewarding stocks of all time. But it is less of an advantage in 2017.
The decline in overall soda consumption will probably continue, particularly in developed markets. Consumers simply are not drinking as much soda as they used to.
Changing consumer habits could continue to disproportionately impact Coca-Cola versus PepsiCo.
Analysts expect Coca-Cola to grow earnings-per-share by 2.6% in 2017. Meanwhile, PepsiCo is expected to increase earnings-per-share by 8.3% this year.
With this in mind, investors should expect PepsiCo to continue growing at a modestly higher rate than Coca-Cola for the foreseeable future, at least until Coca-Cola’s stills segment becomes a bigger part of its portfolio.
Dividend Yield
Winner: Coca-Cola
One major advantage that Coca-Cola has is that its dividend yield is significantly higher than PepsiCo’s.
Coca-Cola’s forward annualized dividend payout of $1.48 per share, provides a 3.5% dividend yield.
PepsiCo’s current annual dividend is $3.01 per share, which represents a 2.8% dividend yield. For every $1 invested in each stock, Coca-Cola will provide approximately 25% more dividend income than PepsiCo.
The biggest reason for this discrepancy is because PepsiCo shares have increased much more than Coca-Cola’s for several years.
Over the past five years, PepsiCo and Coca-Cola have increased 77% and 23%, respectively. This has had the effect of lowering PepsiCo’s dividend yield, relative to Coca-Cola’s.
Another reason is because Coca-Cola has already announced its 2017 dividend increase, whereas PepsiCo’s announcement will come within the next few months.
So, investors can expect PepsiCo’s yield to rise in the near future.
To be sure, both Coca-Cola and PepsiCo have reached legendary status when it comes to dividends.
Coca-Cola happens to be the most owned dividend growth stock among dividend growth bloggers. And PepsiCo is certainly a worthwhile investment on its own.
For income investors, Coca-Cola’s higher dividend yield is a significant difference between the two stocks.
Whether that persists, however, remains to be seen. If PepsiCo’s revenue and earnings continue to grow at a higher rate than Coca-Cola’s, its dividend growth could exceed Coca-Cola’s as well.
Nevertheless, in terms of dividend yield, Coca-Cola has the edge right now.
Final Thoughts
Pitting two companies that dominate their industry is no easy task. Both Coca-Cola and PepsiCo are highly profitable, hold strong brands, and global scale thanks to their world-class distribution.
While Coca-Cola has a longer history of dividend increases, PepsiCo could have better dividend growth potential moving forward.
Therefore, the answer to the question ‘Which stock is better?’ could depend on which type of investor is asking.
Investors who desire higher rates of current income—such as retirees—should pick Coca-Cola, for its significantly higher yield.
That being said, investors with a longer time horizon—such as dividend growth investors—should pick PepsiCo for its stronger growth outlook.
