Coca-Cola(NYSE: KO) is a very well-run company. And it has rewarded investors well for years, noting that it is a Dividend King with 62 consecutive dividend increases under its belt. It has been a holding at Warren Buffett's Berkshire Hathaway for decades and has helped make many investors into millionaires via its slow and steady business growth.
But if you are looking at Coca-Cola today, you might want to consider buying consumer staples peer PepsiCo(NASDAQ: PEP) instead. Here's why.
Coca-Cola is a soda icon
Coca-Cola's business is impressive. You can find its iconic brands, like its namesake Coke, in over 200 countries and territories around the world. The company has the size and scale to back up its brands with huge marketing budgets, a strong distribution system, and a research and development effort that few can match. Coke is the No. 1 cola brand for a reason.
When you look at the consumer staples sector, Coca-Cola ranks among the most important partners for retailers from grocery stores to convenience stores. There are many good reasons for Buffett to own the stock. But there's a small problem here related to Buffett's investment approach, which centers around buying good companies when they are attractively priced. Coca-Cola is not particularly attractively priced right now.
The stock's price-to-sales ratio is currently around 6.5 versus a five-year average of around 6.25. The price-to-earnings ratio is roughly 28.5 compared to a long-term average of 26.3. And the price-to-book value ratio is 11.7 versus a five-year average of 11.1. The dividend yield of 2.75% is near its lowest level of the past decade. Or, to sum all of that up, Coca-Cola's stock looks comparatively expensive.
PepsiCo is a better option right now
If you are looking at Coca-Cola, you might want to consider PepsiCo instead. Looking at it from a pure valuation standpoint, PepsiCo's P/S ratio is 2.6 versus a five-year average of 2.8. Its P/E ratio is 25.8, versus a long-term average that's just shy of 26. And the P/B ratio is 12.4 compared to a five-year average of 13.5. The dividend yield, meanwhile, is 3.1%, which is toward the high side of its 10-year yield range.
Simply put, PepsiCo looks far more attractively priced than Coca-Cola does right now. But that's not the only reason to like PepsiCo over Coca-Cola. Coca-Cola is a beverage giant, but that's all it does. There's nothing wrong with that, but its business is clearly not diversified. PepsiCo is a beverage giant and a salty snack food giant with its Frito-Lay segment. It also has a substantial packaged foods business in Quaker Oats. This diversification gives PepsiCo something to fall back on when one of its divisions isn't hitting on all cylinders.
And, notably, PepsiCo's dividend has more than doubled over the past decade while Coca-Cola's dividend has only grown by around 60%. That's an important factor to consider if you are looking to someday retire on your dividend income, even if you are reinvesting dividends right now. And PepsiCo is a Dividend King, with 52 consecutive annual dividend increases behind it. You don't build a record like that by accident, it requires a strong business that can handle the ups and downs that every company eventually faces over time.
PepsiCo is out of favor and worth buying
This is where the problem comes in. PepsiCo is attractively priced relative to Coca-Cola because Coca-Cola's business is performing better right now. Contrarian investors, however, will see this as an opportunity to buy a great company like PepsiCo while it looks relatively cheap.
Could it be a little while before management gets PepsiCo humming again? Sure. But you'll be paid well to wait, and when the company is hitting on all cylinders again (which a long and successful business history suggests is likely to happen), Wall Street will probably afford it a higher valuation.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,365!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,619!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $412,148!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of October 21, 2024
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
