I'm LongbridgeAI, I can summarize articles.The article compares Coca-Cola and PepsiCo as dividend stocks. While Coca-Cola boasts higher profit margins (28% vs 11%) and a lower payout ratio (63% vs 75%), suggesting stronger future dividend growth potential, it trades at a premium valuation with a forward P/E of 25 compared to PepsiCo's 15. Conversely, PepsiCo offers a significantly higher current yield (4.3% vs 2.4%) and has increased dividends more aggressively in the past five years. The author concludes that PepsiCo is the better buy due to its high yield, discounted valuation, and greater potential upside despite slower recent growth rates.
Coca-Cola (KO +0.20%) and PepsiCo (PEP +0.32%) are iconic businesses, and their stocks are known for being among the best income-generating investments to own.
However, they've been going in vastly different directions. In the past three years, Coca-Cola's stock has risen by around 50%, while PepsiCo's has declined by 21%. And as dividend investors know, that means their yields have been going in opposite directions; Coca-Cola's yield has been shrinking while PepsiCo's has been rising.
But there's more to assessing dividend stocks than just looking at their yields and past performances. Below, I'll look at both of these stocks to see which one is the best option for dividend investors right now, considering their yields, dividend growth rates, overall financial strength, and valuations.
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PepsiCo's yield is higher, and its increases have been more generous in recent years
Both PepsiCo and Coca-Cola have been increasing their payouts for more than 50 consecutive years, making them Dividend Kings. Past dividend growth doesn't guarantee future increases, but it is indicative of a company's commitment to growing the payout. Plus, it also demonstrates confidence in its future earnings growth.
Investors should also, however, consider the rate of dividend increases. A stock that raises its payout by just one cent would technically be increasing it, but that can mean minimal incremental dividend income for an investor. In the past five years, PepsiCo has raised its dividend at a noticeably higher rate than Coca-Cola.
KO Dividend data by YCharts
PepsiCo already offers a higher yield of 4.3% versus 2.4% for Coca-Cola, which gives it the edge in this area. If this trend continues, the gap may grow larger in the future.
Coca-Cola has a leaner business and a lower payout ratio
Coca-Cola has a simpler, less complex business model than PepsiCo, which, in addition to beverages, also includes many top snacking brands. Its business is bulkier, and as a result, its margins are not as impressive as Coca-Cola's. While PepsiCo has averaged a profit margin of around 11% over the trailing 12 months, Coca-Cola's margin is up around 28%.
Furthermore, Coca-Cola's payout ratio of 63% is lower than PepsiCo's, which is around 75%. With a lower payout ratio and better margins, Coca-Cola may be in a stronger position to increase its dividend at a faster rate in the future -- but it's by no means a guarantee.
NYSE: KO
Key Data Points
Investors are paying significantly more for Coca-Cola stock
As good a business as Coca-Cola may be, the stock itself is priced at a hefty premium. It's trading at a forward price-to-earnings (P/E) multiple of 25, which is based on analyst projections of its future earnings. By comparison, PepsiCo's forward P/E is only 15.
The risk with paying a high multiple is that it can limit future returns, and the stock may even be due for a decline if its valuation is highly inflated. While investors have been much more bullish on Coca-Cola's stock in recent years, that may not necessarily be the case in upcoming years, particularly with its forward P/E multiple being as high as it is right now.
NASDAQ: PEP
Key Data Points
PepsiCo is the dividend stock I'd buy today
Coca-Cola has better margins and a lower payout ratio, but that's not enough to make it the better overall dividend stock. Even if Coca-Cola's dividend increases are more generous in future years, the gap between the yields is already fairly significant. Without significant changes in their respective share prices, it could take a long time for Coca-Cola to catch up to PepsiCo.
Ultimately, I don't see a compelling reason why Coca-Cola should be worth a drastically higher premium than PepsiCo. Both businesses are doing well, and even if PepsiCo's rate hikes may not be as high moving forward, it already makes for a fairly safe, high-yielding investment today. At a discounted valuation, it looks to have much more potential upside than Coca-Cola.