[UPDATED: AUGUST 10, 2017]
The Coca-Cola Company (KO) and PepsiCo (PEP) are two of the premier global consumer brands. Both companies have been around for more than 100 years and sell billions of dollars of product annually.
They’re leaders in their segment, but how do they compare?
PEP may own a more diverse product line, but KO has been able to drive more earnings to its bottom line. While KO’s net income has been trending downward in recent years, it manages to stay ahead thanks to superior margins. PEP has produced consistent net profit margins of around 10%, while KO margins have been in the 15-18% range for the past several years.
KO may be able to produce more net income, but PEP has been generating more top-line revenue than KO for decades. KO is primarily a beverage business, but PEP generates around half of its sales from food brands such as Doritos, Frito Lay and Quaker Foods. Soda sales declined for the 12th consecutive year as investors have been turning to bottled water and other healthier beverages, a trend that could affect KO more than PEP.
3. Consecutive Dividend Increases
Both KO and PEP have served their shareholders well over the past several decades with their commitment to continuously paying and growing their quarterly dividends. Both KO and PEP are dividend aristocrats, which are companies that have raised their dividend for at least 25 consecutive years. As a result, these companies are highly sought after by dividend investors for their predictable and sustainable income streams.
Find other companies that have increased their dividends for more than 25 consecutive years, in our 25-year dividend increasing stocks page.
4. Dividend Growth
Perhaps just as impressive as their streak of consecutive dividend increases is the rate at which KO and PEP have grown their dividends. KO has averaged an 8.5% annual increase over the past decade, while PEP has posted an average raise of nearly 10% over the same time frame.
Check out Why Pepsi is a Core Dividend Stock.
5. Dividend Payout & Yield
Due to the cash-intensive nature of their businesses, PEP and KO have been able to offer shareholders a dividend yield well above that of the S&P 500 for most of the past decade. KO is currently one of the ten highest-yielding Dow stocks, and both companies have doubled their annual dividend per share since 2007.
6. Social Media Following
Social media is an ideal channel for marketing a business, since users essentially opt in to receive low cost advertising. Effective strategies generate strong word of mouth and can reach millions of individuals in minutes. KO recently passed 100 million likes on Facebook, while Pepsi also maintains a strong presence. Both companies have smaller, yet important, followings on other platforms such as Twitter and Instagram.
7. Advertising Spending
Companies can spend billions of dollars each year promoting their products to existing and potential customers. In 2016, KO eclipsed the $4 billion mark in worldwide ad spending with PEP spending around $2.5 billion. Both companies regularly produce commercials for the Super Bowl, while PEP is in the midst of a 10-year contract to sponsor the halftime show.
8. Price Performance
The continued weakness in soda sales has especially impacted KO’s stock. Over the past five years, KO has significantly trailed the performance of both PEP and the S&P 500. PEP’s more diversified lineup of food products has helped soften the blow of declining soda sales. However, on an overall basis, both companies have been experiencing negative sales growth. Due to these factors, KO and PEP have both been underperformers compared to the broader market.
9. Market Cap & P/E Ratio
KO currently ranks #26 on the list of largest companies traded on U.S. stock exchanges, while PEP comes in at #37. Thanks to stagnating or declining net incomes, the valuations of the two beverage giants is starting to push into overvalued territory. The P/E ratios of both stocks have been climbing steadily over the past five years and now sit above that of the S&P 500.
10. Free Cash Flow
Free cash flow is essentially what is left over after a company pays all of its bills and reinvests back into its business. Higher free cash flows mean greater flexibility for the business to pursue new growth opportunities and pay higher dividends. KO and PEP are both strong cash flow generators, and have been for years. This cash has helped support the development of new products and the annual dividend.
The Bottom Line
Both companies have healthy balance sheets and generate lots of cash, but a lack of growth is cause for concern. The declining soda sales trend affects the core of both KO and PEP, but they are developing and growing a lot of new products to help replace that lost revenue. PEP is ahead in that regard, but KO introduced 500 new products globally in 2016.
Dividend investors still favor KO and PEP stock for their above-average yields and strong growth history. Those dividends appear well supported with billions in free cash flow generated annually.