The Coca-Cola Company And PepsiCo Are Both Good Buys

But PepsiCo Is Still The Better Choice Versus The Coca-Cola Company 

We absolutely by no means want anyone to think that The Coca-Cola Company NYSE: KO is not a good company, PepsiCo NASDAQ: PEP competition or not. The Coca-Cola Company is a blue-chip operator that pays a very healthy and high-yielding dividend and it is a stock we want to own. Except for Pepsico being in the picture, of course. 

The biggest difference, other than their operating models (PepsiCo is diversified into snacks/food while The Coca-Cola Company is a beverage pureplay), is that The Coca-Cola Company is far more mature in regards to its investment potential and we’d like a horse with better legs. While the companies are highly comparable in many ways, PepsiCo seems to edge out The Coca-Cola Company in every way. 

The Coca-Cola Compay Outperforms PepsiCo, But … 

Both The Coca-Cola Company and PepsiCo put in strong quarters but The Coca-Cola Company outperformed PepsiCo, at least on the face of things. The Coca-Cola Company saw its revenue grow by 10.5% and beat the consensus by 640 basis points compared to PepsiCo’s 12.4% and 416 basis point beat but there is pricing to consider. The Coca-Cola Company report its growth is primarily due to pricing increases while PepsiCo’s revenue was underpinned by 11.9% organic growth and strength in all operating segments. 

“Our full year net revenue growth meaningfully accelerated in 2021 versus the previous year and this gives us added confidence that the investments we’ve made in our people, brands, innovation, supply chain, go-to-market systems and digitization initiatives are working,” said PepsiCo Chairman and CEO Ramon Laguarta.

As for earnings, The Coca-Cola Company outperformed there are well, at least in regards to the analyst's estimates, with adjusted EPS of $0.45 beating by $0.04. The difference, again, is that The Coca-Cola Company’s performance is based on pricing increases, which is good, but PepsiCo is still outpacing the Marketbeat.com consensus and growing double-digits without price increases. In our view, this leaves PepsiCo in a better position because it can begin raising prices at any time it wants while The Coca-Cola Company has already used up some of its ammunition. 

The Coca-Cola Company Gives Better Guidance, Except … 

Both The Coca-Cola Company and PepsiCo are guiding for growth but the same conditions apply. While The Coca-Cola Company is guiding for slightly better growth on both the top and bottom lines that growth is because of price increases and not organic sales. In our view, this is a no-brainer as PepsiCo is once again growing on an organic basis without the aid of aggressive price increases leaving it with ample pricing power should and when the need arises.  

In the meantime, we also like PepsiCo’s dividend better than The Coca-Cola Company because the yield-to-value ratio is nearly identical (similar yield, similar value) while PepsiCo has a better outlook for growth. The Coca-Cola Company will go on increasing the dividend like it has for the last 59 years but at a slower pace than PepsiCo. KO’s 5-year distribution CAGR is running near 3.7% with a payout ratio of 71% compared to Pepsico’s 7.5% CAGR and 68% payout ratio. 

The Technical Outlook: PepsiCo Outperforms The Coca-Cola Company 

The Coca-Cola Company has been tracking in tandem with PepsiCo recently but, the farther back you go in price history, the bigger the margin of outperformance (by PepsiCo) grows. Starting the chart at 2020, just before the pandemic chaos put the operating models in sharp contrast, shows Pepsico outperformed by 28% and we think that trend will remain in place. So, The Coca-Cola Company is not a bad investment but, if you are trying to decide between it or Pepsico it looks to us like Pepsico is by far the better choice.