World-famous investor Warren Buffett loves consumer-facing brands with long histories of excellence. This has undoubtedly influenced how he manages his portfolio at Berkshire Hathaway. Of the dozens of stocks the company owns, two stand-out food and beverage companies are among its largest holdings.
Coca-Cola(NYSE: KO) is Berkshire's fourth-largest holding at 9% of its portfolio, while Kraft Heinz(NASDAQ: KHC) is eighth at 3.6%.
Both dominate your local grocery store, but which is the better buy for your portfolio right now?
After putting these two consumer product heavyweights head to head, one company stood out. Here is what you need to know.
Two similar companies with one crucial difference
Coca-Cola sells ready-to-drink beverages, including sodas, water, teas, coffees, juices, and sports drinks. Some of its famous brands include Coca-Cola, Sprite, Fanta, and Dasani. Kraft Heinz sells packaged foods, including brands like Kraft, Heinz, Oscar Mayer, Lunchables, and Philadelphia.
Coca-Cola and Kraft Heinz are both leaders in the food and beverage industry, so there is a lot of overlap between them and how they appeal to investors. Both are stodgy, defensive stocks because the companies sell consumer-facing products people buy frequently when grocery shopping. Both companies hold up relatively well during good and bad times, so investors can buy the stocks and sleep well at night.
Yet, Coca-Cola has one tremendous advantage over Kraft Heinz. The company outsources most of its bottling to over 200 independent partners, so it doesn't need to sink as much money into production. It makes Coca-Cola a more efficient business that generates a far higher return on invested capital (ROIC) than Kraft Heinz:
KO Return on Invested Capital data by YCharts
A high ROIC can compound for a business over time, leading to more efficient earnings growth and potentially higher investment returns.
High dividend yield versus consistent dividend growth
Dividends are a common feature of consumer goods stocks, and both companies deliver here.
Coca-Cola is a legendary dividend stock, a Dividend King with over six decades of annual dividend increases. On the other hand, Kraft Heinz is establishing its dividend after a rocky past -- the blockbuster merger between Kraft Foods and R.J. Heinz in 2015 loaded the balance sheet with debt.
Investors should be able to count on both companies for dividends. Their respective dividend payout ratios are manageable, and Kraft Heinz has steadily improved its balance sheet over the past several years. Coca-Cola's dividend is approximately 68% of its estimated 2024 earnings versus 53% for Kraft Heinz.
At its current share price, Kraft Heinz has a notably higher starting dividend yield, at 4.6%. Coca-Cola's dividend yield is solid but far lower, at 2.7%. Some may prefer Coca-Cola's superior track record, but Kraft Heinz offers far more immediate income, which may be more attractive for some investors.
Which is the better value?
Despite their similarities, Coca-Cola and Kraft Heinz trade at wildly different valuations. Coca-Cola and Kraft Heinz trade at 25 times and 11 times their respective 2024 earnings estimates. But this isn't the whole story. Growth prospects play a role in stock valuations, and the market expects more growth from Coca-Cola. Additionally, analysts have grown increasingly pessimistic toward Kraft Heinz, lowering their estimates quite a bit over the past year:
KO EPS LT Growth Estimates data by YCharts
I like using the PEG ratio to compare a stock's valuation to the company's expected growth. A lower PEG ratio implies you're paying less for that growth. Kraft Heinz does have an edge here, with a PEG ratio of 3.6 versus Coca-Cola's 4.3.
But which stock should you buy today?
Coca-Cola looks like the better business. The company's superior ROIC, dividend history, and higher expected growth all put it over Kraft Heinz. However, It's an expensive stock. I generally look for PEG ratios under 2, so Coca-Cola is well above that threshold, even if you give it some extra points for its blue chip fundamental qualities.
Kraft Heinz also doesn't look cheap today, but low-single-digit growth is a low bar to clear, and if analysts had maintained their estimates from earlier this year, the stock would look much more attractive.
I won't push back against anyone who buys Kraft Heinz for its well-funded and high-yielding dividend. The stock could also prove a bargain in hindsight if growth winds up higher than expected. However, valuation matters less over the long run, and Coca-Cola's strong ROIC should create value for investors as the years pile up. I wouldn't be jumping for joy at Coca-Cola's current valuation, but it's not so unreasonable that I would choose an inferior company instead. That said, at 25 times earnings, I wouldn't chase Coca-Cola any higher.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
