Insights

Better Buy: Coca-Cola vs. PepsiCo

Coca-Cola (NYSE: KO) and PepsiCo (NASDAQ: PEP) are both considered dependable defensive stocks during bear markets. Both packaged food makers own evergreen brands, generate plenty of cash, and consistently repurchase their own shares while paying out high dividends.

Both stocks have risen more than 10% over the past 12 months as inflation, rising interest rates, the Ukrainian war, and other macroeconomic headwinds caused the S&P 500 to dip about 6%. Should investors buy either of these soda stocks to hedge against deeper market declines?

Image source: Getty Images.

The differences between Coca-Cola and PepsiCo

Coca-Cola and PepsiCo are frequently mentioned in the same breath, but the two companies operate completely different business models.

Coca-Cola only sells beverages, and its sprawling portfolio includes juices, teas, sports drinks, bottled water, coffee, and even alcoholic drinks. PepsiCo also sells a wide range of non-carbonated drinks — including Gatorade, Aquafina, and other licensed brands — but it also sells packaged foods through its Frito-Lay, Quaker, and Pioneer Foods subsidiaries.

Both companies dealt with declining soda consumption rates over the past few decades by expanding and diversifying their portfolios. They’ve also refreshed their flagship sodas with smaller serving sizes, new flavors, and healthier versions that are packed with less sugar and caffeine. PepsiCo also refreshed its “junk food” brands with similar health-conscious strategies.

Which company is growing faster?

Coca-Cola and PepsiCo both struggled with slower growth in 2020 as many restaurants shut down during the pandemic.

However, PepsiCo countered those headwinds more effectively than Coca-Cola by selling more packaged foods through busy brick-and-mortar retailers. Those pandemic-induced headwinds waned last year, and both companies generated accelerating organic revenue growth once again.

Period

2018

2019

2020

2021

Coca-Cola Organic Revenue Growth

5%

6%

(9%)

16%

PepsiCo Organic Revenue Growth

4%

5%

4%

10%

Data source: Company earnings reports.

Coca-Cola and PepsiCo both expect that momentum to continue this year, even after factoring in the recent suspensions of their operations in Russia. Coca-Cola expects its organic revenue to rise 12%-13% for the full year, while PepsiCo expects its organic revenue to increase 10%.

Which company is more profitable?

Both companies are firmly profitable, but PepsiCo’s earnings growth remained more stable than Coca-Cola’s throughout the pandemic.

Period

2018

2019

2020

2021

Coca-Cola EPS Growth

9%

1%

(8%)

19%

PepsiCo EPS Growth

9%

(1%)

2%

12%

Data source: Company earnings reports. Excludes acquisitions, divestments, and currency impacts.

For 2022, Coca-Cola expects its comparable earnings per share (EPS) to grow 14%-15% on a constant currency basis, or rise 5%-6% after factoring in the currency headwinds from a strong dollar. PepsiCo expects its core EPS (which is similar to Coca-Cola’s comparable EPS) to increase 8% in constant currency terms, or to grow 6% after factoring in the currency headwinds.

Coca-Cola and PepsiCo both face inflationary headwinds, but they’re both reining in their spending and raising their prices to counter that pressure. That classic strategy isn’t foolproof, but it’s worked well throughout previous inflationary cycles. Consumers will also likely continue to buy their products regardless of the macro headwinds or the threat of a potential recession.

Which Dividend King is the better buy?

Coca-Cola and PepsiCo are both Dividend Kings of the S&P 500, meaning they have raised their dividends annually for at least 50 straight years.

Coca-Cola currently pays a forward dividend yield of 2.7%, which is slightly higher than PepsiCo’s forward yield of 2.6%. Both stocks trade at 26 times forward earnings. Those P/E ratios are a bit elevated, but they reflect their popularity as safe haven investments in this challenging bear market.

Coca-Cola and PepsiCo are still both great long-term investments. But if I had to choose one over the other right now, I’d stick with PepsiCo because its business is more broadly diversified across the beverage and packaged foods markets. That diversification helped it outperform Coca-Cola during the pandemic, and it could insulate it from other challenges in the future.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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