The Coca-Cola Company (NYSE: KO) gets no shortage of attention from investors. It’s been publicly traded for more than 100 years and has created many millionaires along the way. Moreover, it counts famed investor Warren Buffett among its fans, which goes a long way in boosting investor sentiment.
However, I’d buy shares of PepsiCo (NASDAQ: PEP) today if I were forced to choose between it and Coca-Cola. Don’t get me wrong: I often drink Coke products and have loved the iconic branding since I was young.
But Pepsi has something that Coke doesn’t and it makes all the difference for me when thinking about these two companies as an investor, not a consumer.
But first, here’s how Pepsi and Coke are alike
Both Pepsi and Coca-Cola are Dividend Kings, meaning that each has paid and increased the dividend annually for at least 50 years.
With dividend stocks, two important metrics are the dividend yield and the dividend payout ratio. The dividend yield tells investors how much annual dividend income they can expect relative to their investment — a 1% yield gives $1 per $100 invested.
But dividends aren’t guaranteed; companies can stop paying them if they don’t have enough earnings. And that’s why a payout ratio is important. A payout ratio shows how much of a company’s earnings are being used for the dividend.
Pepsi and Coke are extremely similar when it comes to the dividend yield and the payout ratio, as the chart below shows.
If one of these two companies had a better track record, a higher yield, or a lower payout ratio, then perhaps my opinion would be different. But Pepsi and Coca-Cola are very alike in these important metrics, which doesn’t give either company an edge.
This is why I’m looking at something else when picking Pepsi stock over Coca-Cola stock today.
The simple reason I prefer Pepsi stock
When people think of Coca-Cola and Pepsi, they think of two behemoth beverage businesses. And in the case of Coca-Cola, this is true — the company is a pure-play beverage company and one of the very best at what it does. However, Pepsi is a much more diverse business, which is why I prefer it over Coca-Cola.
In addition to beverages such as Pepsi, Mountain Dew, and Mug Root Beer, PepsiCo owns snacking brands with its Frito-Lay division and it also sells food items with its Quaker Oats segment.
Pepsi breaks out the numbers for Frito-Lay and Quaker Oats in North America. These business segments in this market accounted for nearly 31% of Pepsi’s overall revenue in 2023. Moreover, they accounted for a whopping 60% of Pepsi’s operating profit.
By having business operations in beverages, snacks, and foods, PepsiCo is a diverse business and that comes in handy. Investing is about taking a long-term perspective and many unforeseen things can happen with a business or the economy. But I’m fairly confident that Pepsi will perform better than some of its peers because if one part of its business slips, it has the other parts of the business to hold it steady.
It’s more than just this: Pepsi’s “other” businesses are also an important component of future profitable growth. In the company’s earnings call to discuss financial results for the fourth quarter of 2023, CEO Ramon Laguarta pointed out that snacks have pushed its international operations to a $40 billion business annually. And this scale is important.
According to Laguarta, Pepsi’s scale in international markets is leading to higher profits. And to him, this means that international growth is the company’s “most remarkable and exciting opportunity.” In short, more growth outside of the U.S. will lead to more economies of scale and better profits.
Therefore, between these two companies, I see a clearer path for Pepsi to grow its profits compared to Coca-Cola. And I believe that profit growth will give Pepsi a better opportunity to keep growing its dividend for many years as well as provide more upside potential for the stock.
Should you invest $1,000 in PepsiCo right now?
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Simple Reason That I’d Buy Pepsi Stock Before Coca-Cola Stock was originally published by The Motley Fool