The best stock to buy right now: Coca-Cola vs. PepsiCo

While still generating positive returns for investors, longtime competitors Coca cola (K.O 1.00%) and PepsiCo (PEP 0.48%) they performed below the market reference level S&P 500 in the last five and 10 years. Both beverage giants have faced a slowdown in demand for their core products, leading to acquisitions in an effort to diversify. With these two factors in mind, it’s a great opportunity to check out these two benchmark stocks to see which one stands out as a potential candidate to generate huge returns in the future.

Which companies have recently acquired Coca-Cola and PepsiCo?

While Coca-Cola and PepsiCo have their roots in their namesake beverages, the companies’ worldwide distribution network has allowed them to expand their offerings and grow through acquisition.

In the past decade, Coca-Cola’s notable acquisitions include sparkling water brand Topo Chico for $220 million, coffee company Costa for $4.9 billion, and sports and hydration drink company BodyArmor for $5.6 billion. dollars.

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

Both companies have successfully stabilized their net sales, partly due to recent acquisitions. Looking at the numbers, Coca-Cola generated $46.5 billion in net sales over the past 12 months. This is a significant improvement from the minimum annual net sales of $33 billion in 2020 and only 3% from the annual net sales of $48 billion in 2012.

Comparatively, PepsiCo’s net sales rebounded much more quickly after a period of stagnation in the mid-to-late 2010s. In the last 12 months, PepsiCo generated net sales of $92.1 billion, an all-time high 12 months and a 41% increase over its 2012 net sales of $65.5 billion.

KO Revenue (TTM) data by YCharts.

Is Coca-Cola or PepsiCo stock cheaper?

Although PepsiCo’s net sales are nearly double those of Coca-Cola, it has a smaller market capitalization of $243.9 billion compared to Coca-Cola’s $306.8 billion. That’s because Coca-Cola is more profitable, thanks to its higher gross margin and operating margin. Over the past 12 months, Coca-Cola generated $9.1 billion in free cash flow, while PepsiCo produced $7 billion.

Another factor contributing to PepsiCo’s lower market cap is its higher debt burden. PepsiCo has $38.3 billion in net debt, while Coca-Cola has $24.8 billion. However, it’s important to point out that Coca-Cola recently paid $6 billion in back taxes and interest to the IRS related to a 17-year-old tax case that doesn’t count toward its 24-year net debt. 8 billion dollars.

Excluding tax, Coca-Cola’s debt has fallen 15.8% over the past five years, while PepsiCo’s has risen 42.9%. That led to higher interest expense for PepsiCo — $854 million over the past 12 months, compared to Coca-Cola’s $545 million.

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

KO Price on Free Cash Flow Data by YCharts.

Is Coca-Cola or PepsiCo more shareholder friendly?

For mature companies like Coca-Cola and PepsiCo, investors generally 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 count over the past five years by 0.6% and 1.5% respectively. Instead, both Coca-Cola and PepsiCo prioritize consistent and growing dividends.

Coca-Cola currently pays a quarterly dividend of $0.485 per share, representing 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. The Coca-Cola streak is currently 62 years in a row.

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

With any dividend stock, investors should enter its payout ratio, which calculates the percentage of a company’s earnings paid out as dividend income. Coca-Cola and PepsiCo have relatively high payout ratios of 75.6% and 73.4%, respectively. Neither payout ratio is too concerning, but each company’s management will likely feel compelled to raise it annually given each stock’s Dividend King status. As a result, debt levels and shares outstanding will slowly decline.

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

Is Coca-Cola or PepsiCo the better stock to buy?

Neither Coke nor Pepsi should be considered growth companies, nor should their stocks be expected to outperform the S&P 500 without other significant acquisitions. However, these stocks are strong for any income-seeking portfolio due to their consistent returns and history of growing dividends.

When deciding which stock is the best buy today, Coca-Cola edges out PepsiCo because of its stronger valuation and balance sheet, making it the preferred choice for dividend investors.