Better Dividend Buy: PepsiCo vs. Coca-Cola

If you’re thirsty for passive income right now, you’re in luck. Many dividend stocks have been left out of the stock market’s 2023 rally, meaning their yields are elevated even as their valuations have declined. It’s a win-win for dividend fans.

All those positive factors apply to some degree with both PepsiCo (PEP -0.57%) and Coca-Cola (KO 0.19%). But which dividend stock belongs in your portfolio?

Sales trends

Both businesses are enjoying solid organic sales growth trends, yet there are important differences for investors to note. PepsiCo is expanding at a slower pace thanks to its diverse product line that includes snacks and breakfast foods.

Pepsi’s beverage sales are more tilted toward grocery chains, too, while Coca-Cola sells more on-the-go drinks at places like restaurants. This away-from-home niche has been growing quickly as consumers prioritize entertainment, dining out, and travel in the wake of the pandemic lockdowns.

That factor helps explain how Coke could grow at an 11% rate this past quarter while Pepsi managed a 9% uptick. Look beneath that headline figure and you’ll see another reason to like Coke’s growth over Pepsi’s. The beverage giant reported 2% higher sales volumes while its smaller rival had to rely entirely on rising prices to boost revenue. Pepsi’s sales volumes were down 1.5% in the period.

Margin preferences

Coke easily wins the matchup when it comes to earnings. Its massive global sales footprint allows for unusually high profits, with operating margin landing at 28% of sales. That’s roughly double PepsiCo’s level.

There’s a risk that goes along with that success, though. Coke is a bit more susceptible to changing preferences in the beverage industry while PepsiCo can lean on its food businesses during those shifts. Coke’s sales were hit harder during the initial phases of the pandemic for that reason.

KO Operating Margin (TTM) Chart

KO Operating Margin (TTM) data by YCharts

Still, Coke’s higher profit margin also comes with ample cash flow. The beverage giant has generated $8 billion of free cash flow over the last nine months, up $600 million compared to the prior year.

PepsiCo is also no slouch in this department. Management is expecting to deliver $8 billion of cash returns to shareholders this year, mainly through dividend payments.

Dividend and price

As you might expect, you’ll have to pay a premium for Coke compared to PepsiCo stock. Shares are priced at 5.5 times sales, more than double Pepsi’s 2.5 rate. The good news is that both of those valuations have come down in recent months, meaning you’ll get a relative deal in either case. Pepsi started the year valued at 3 times sales and investors were paying 6.5 times revenue for Coke back in early January.

There’s a bit more instant income available with Coke as well, given that the stock is yielding 3.2% today compared to PepsiCo’s 2.9% rate. Coke’s most recent annual increase was 5% while Pepsi last announced a 10% boost, its 51st consecutive hike.

Income investors seeking a bit more diversity and lower risk should consider Pepsi stock here. It has a good shot at maintaining solid earnings trends even in a recession, while Coke might struggle if on-the-go demand shrinks.

If you’re more growth focused, though, then Coke should be your choice thanks to its stronger demand trends and stellar profit margin. It is well worth the premium in that context, and you also get a bigger yield from simply holding its shares. Both companies should generate solid long-term returns, but Coke looks like the better all-around choice today.

Demitri Kalogeropoulos 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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