In the soda industry, two companies reign supreme: PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO). These two have become the largest soda companies in the U.S., but these are no easy times for soda.
Soda sales have fallen each year for the past decade in the U.S. as Americans are taking a more critical view of soda than ever before. The shift in consumer purchasing habits toward healthier foods and drinks has collided with Americans’ love of Pepsi and Coca-Cola. In the fight against obesity, Americans are putting sugary, high-calorie drinks under much more scrutiny ̶ and that places soda directly in the cross-hairs.
In response, both PepsiCo and Coca-Cola have diversified their business models to adapt to the new environment. But they have done so in different ways, which could have implications for each company’s future.
A Tale of Two Soda Stocks
PepsiCo and Coca-Cola have each built very large, global businesses with dozens of popular brands. PepsiCo’s beverage offerings include its namesake Pepsi soda, as well as Gatorade, Tropicana, Aquafina and Lipton. It has 22 brands that each collect at least $1 billion or more in annual sales. Meanwhile, Coca-Cola has 20 brands that have reached the $1 billion revenue mark.
The key difference between PepsiCo and Coca-Cola is that PepsiCo has a large food business under the Frito-Lay and Quaker brands. PepsiCo derives about half of its sales each year from beverages, and half from food. For its part, Coca-Cola’s billion-dollar brands are concentrated in beverages.
Coca-Cola is seeing success with its teas, juices, and water brands, which include Gold Peak, Dasani and Minute Maid. This helped Coca-Cola’s still-beverage segment grow case volumes by 5% last year.
But Coca-Cola has been hit harder by the decline in soda. Last year, Coca-Cola’s sparkling-beverage case volume grew just 1% for the year. Coca-Cola’s total revenue and operating profits declined by 4% and 10%, respectively, in 2015.
PepsiCo is faring better thanks largely to its growing food and snacks businesses. Last year, PepsiCo’s organic earnings-per-share rose 10% from the previous year, while Coca-Cola notched 5% growth in organic EPS.
PepsiCo Dividend, Coca-Cola Dividend
The PepsiCo dividend and Coca-Cola dividend: this is something the two companies have in common. The stocks offer similar 3% dividend yields.
In addition, they each maintain long track records of raising their dividend payouts each year. Both PepsiCo and Coca-Cola are members of the Dividend Aristocrats list, a group of S&P 500 companies that have increased dividends for the past 25 years in a row.
The PepsiCo dividend has now been raised for 44 years in a row, while Coca-Cola has increased its own dividend for the past 54 consecutive years.
The Best Dividend Stock Is . . .
PepsiCo and Coca-Cola each generate billions in free cash flow, and return similar amounts of cash to shareholders as dividends. PepsiCo is better prepared to withstand the erosion in the soda industry. Coca-Cola has placed all of its focus on beverages, and while it has built up a number of growth brands in juices and teas, it still derives the majority of its revenue and profit from sparkling beverages.
PepsiCo’s large food business insulates it against further declines in soda sales, and it also provides the company with valuable leverage at retailers. Investors should expect higher growth rates from PepsiCo going forward, which is why it’s the better dividend stock of the two.
Disclosure: The author is personally long PEP.
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