Best Stocks to Buy Now: Coca-Cola vs. PepsiCo

While they continue to generate positive returns for investors, competitors have long been Coca-Cola (KO 1.00%) AND PepsiCo (ENERGY 0.48%) performed worse than the market benchmark S&P500 over the past five and ten years. Both beverage giants have struggled with slowing demand for their core products, leading to acquisitions in order to diversify. Given these two factors, it’s a great time to check out these two benchmark stocks to see which one stands out as a potential candidate to generate above-average returns in the future.

Which companies have recently been acquired by Coca-Cola and PepsiCo?

Coca-Cola and PepsiCo draw inspiration from drinks of the same namesake, but the companies’ global distribution networks have allowed them to expand their offerings and grow through acquisitions.

Over the past decade, Coca-Cola’s major acquisitions have included the Topo Chico sparkling water brand for $220 million, coffee company Costa for $4.9 billion and sports and hydration drink company BodyArmor for $5.6 billion.

Meanwhile, PepsiCo has recently focused on energy drink makers, acquiring Rockstar Energy for $3.85 billion in 2020 and investing $550 million in it Celsius Holdings in 2022.

Both companies have successfully stabilized net sales, thanks in part to recent acquisitions. When you look at the numbers, Coca-Cola generated net sales of $46.5 billion over the past 12 months. That’s a significant improvement from its lowest annual net sales level of $33 billion in 2020 and just 3% from its highest annual net sales level of $48 billion in 2012.

By comparison, PepsiCo’s net sales have rebounded much more quickly after a period of stagnation in the mid- and late 2010s. PepsiCo generated $92.1 billion in net sales over the past 12 months, its highest ever for any 12-month period and an increase of 41% over 2012 net sales of $65.5 billion.

KO revenue data (TTM) by YCharts.

Are Coca-Cola or PepsiCo shares cheaper?

Even though PepsiCo’s net sales are almost twice as high as Coca-Cola’s, its market capitalization is smaller, at $243.9 billion compared to Coca-Cola’s $306.8 billion. This is because Coca-Cola is more profitable due to higher gross margins and operating margins. Over the past 12 months, Coca-Cola generated $9.1 billion in free cash flow, while PepsiCo generated $7 billion.

Another factor contributing to PepsiCo’s lower market capitalization is its higher debt load. PepsiCo has $38.3 billion in net debt, while Coca-Cola has $24.8 billion. It is important to note, however, that Coca-Cola recently paid $6 billion in back taxes and interest to the IRS related to a 17-year-old tax case, which is not included in its $24.8 billion net debt.

Excluding taxes, Coca-Cola’s debt has fallen 15.8% over the past five years, while PepsiCo’s debt has risen 42.9%. As a result, PepsiCo has incurred higher interest costs—$854 million over the past 12 months, compared with $545 million for Coca-Cola.

In terms of valuation, Coca-Cola is slightly better valued. Its price-to-free cash flow ratio is 34, compared to PepsiCo’s 35.2, making Coca-Cola a cheaper stock.

KO price to free cash flow data by YCharts.

Which brand is more shareholder-friendly: Coca-Cola or PepsiCo?

In the case of mature companies like Coca-Cola and PepsiCo, investors typically look to distribute profits through dividends and share buybacks. Both beverage giants have moderate share buyback strategies, with Coca-Cola and PepsiCo reducing their share counts by 0.6% and 1.5%, respectively, over the past five years. Instead, both Coca-Cola and PepsiCo are betting on steady and growing dividends.

Coca-Cola currently pays a quarterly dividend of $0.485 per share, which represents a dividend yield of 2.7%. The stock is in the exclusive club of Dividend Kings, having paid and increased its dividend for at least 50 consecutive years. Coca-Cola’s streak now stands at 62 consecutive years.

PepsiCo is also in the Dividend Kings club, having paid and raised its dividend for 52 consecutive years. PepsiCo currently pays a quarterly dividend of $1.35 per share, which equates to a dividend yield of 3%.

For dividend stocks, investors should look at the payout ratio, which calculates the percentage of a company’s earnings that are paid out as dividend income. Coca-Cola and PepsiCo have relatively high payout ratios, at 75.6% and 73.4%, respectively. Neither payout ratio is particularly worrisome, but each company’s management will likely feel obligated to raise it annually, given each stock’s Dividend King status. As a result, debt levels and the number of shares outstanding will slowly decline.

Overall, both stocks are a dividend seeker’s dream. That said, PepsiCo has the slight edge of being more shareholder-friendly, with a higher dividend yield and lower payout ratio than Coca-Cola.

Is it better to buy Coca-Cola or PepsiCo shares?

Neither Coca-Cola nor Pepsi should be considered growth stocks, nor should their stocks be expected to outperform the S&P 500 without any further significant acquisitions. However, these stocks are pillars of any income-oriented portfolio due to their consistent earnings and history of growing dividends.

When deciding which stocks are a better buy today, Coca-Cola comes out ahead of PepsiCo due to its valuation and stronger balance sheet, making it a better choice for dividend investors.