Over the past few years, the soda industry has been facing several problems as consumers are increasingly moving away from sugary drinks to healthier options. Since 2004, total soda consumption has decreased every year in the United States. Moreover, per capita consumption of carbonated drinks plunged to a 30-year low in 2015 and is projected to further decline in the coming years.
Accordingly, major soft drink manufacturers like The Coca-Cola Co. (KO, Financial) and PepsiCo Inc. (PEP, Financial) are struggling with the shift in consumer preferences. Of the two, however, PepsiCo appears to be the better investment option due to its diversified product portfolio.
In 2016, Coca-Cola was down approximately 4%, whereas PepsiCo was up nearly 5%. Furthermore, Coca-Cola reported comparatively feeble fourth-quarter results in February. For the quarter, the company recorded earnings per share of 37 cents, in line with the estimates.
On the other hand, the quarterly revenue came in at $9.41 billion, exceeding the estimates by $270 million. Despite the beats, however, revenue declined 6% from the prior year. This clearly suggests the company endures facing growth headwinds even with the continued efforts to turn the things around. Moreover, it is also struggling to produce value for shareholders due to the meager performance of its core carbonated brands in developed markets.
When it comes to the dividend, both companies offer strong dividend yields. Coca-Cola offers a forward dividend yield of approximately 3.5%, significantly greater than PepsiCo’s dividend yield of 2.7%. As a matter of fact, Coca-Cola has continually increased its dividend for the past 55 years, beating PepsiCo’s streak of 45 years. Based on the dividend history alone, Coca-Cola looks like the sure-shot winner.
A look at the payout ratios of both the companies, however, reveals a completely different story. In 2016, Coca-Cola paid out approximately 95% of its earnings and 92% of its free cash flow in dividends. On the other hand, PepsiCo paid out 68% of its earnings and 57% of its free cash flow. This indicates PepsiCo still has plenty of room to increase its dividend in the future.
Most importantly, PepsiCo also has a portfolio of packaged foods and snacks brands, while Coca-Cola is still heavily dependent on beverages as well as investments in bottling operations.
Summing up
While both PepsiCo and Coca-Cola offer a healthy dividend yield, PepsiCo appears to be a better dividend stock. Moreover, PepsiCo currently trades at a price-earnings (P/E) ratio of approximately 25, reasonably lower than Coca-Cola with a P/E ratio of 28. Apart from this, PepsiCo also has a healthier payout ratio, which means it has comparatively greater potential for increasing its dividends in the year ahead.
As an outcome, investors looking to profit from the beverage industry should continue their long-term journey with PepsiCo instead of Coca-Cola.
Disclosure: No position in the stocks mentioned in this article.
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