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PepsiCo (NYSE:PEP) and Coca-Cola (NYSE:KO) are the leading beverage companies with operations and markets all over the world. Both companies have registered strong financial results in the past. However, I believe KO is a better investment opportunity than PEP at current valuations (KO has a PEG of 2.3 compared to PEP's 4). Also, KO has higher margins and registered better sales volume growth of 4% compared to PEP's 1% in 3Q'12.

PepsiCo
PEP is a global food and beverage company that offers its products in more than 200 countries. The company's famous brands are Pepsi, Doritos, and Cheetos. Many of the brands offered by the company hold leading market positions in their respective categories. Approximately 50% of the total sales of the company are generated from markets outside the U.S. Also, the company has a significant emerging market exposure which allows it to experience a healthy growth rate.

PEP has posted strong financial performance in the past despite sluggish consumer spending and rising commodity prices. In the last five fiscal years, the company experienced high annualized growth rates of 14% for its top line and 4% for EPS. If we analyze quarterly results, PepsiCo posted mixed results for 3Q'12. Sales volume for the most recent quarter were up by 1% and experienced organic revenue growth of 5% YOY, and was able to beat the EPS consensus by 2 cents by reporting a core EPS of $1.2. As the company has significant international exposure, 5% of its quarterly revenue fell due to foreign currency headwinds. Also, the company was able to improve upon its gross margin for the quarter by 60 bps.

PepsiCo offers a decent dividend yield of 3.1% and has a strong dividend history. In the last five years, the company has increased its quarterly dividends at an annualized rate of 11%. Given the strong dividend history and current operating cash flow yield of 7.7%, I believe the company would not have any problems in sustaining its dividends.

Coca-Cola
KO is a beverage company that has more than 500 non-alcoholic brands. Also, the company has the highest market share in the beverage industry. Approximately 60% of the total revenue for the company is generated from markets other than the U.S.

KO has posted strong financial results in the recent years. The company was able to increase sales by 14% and EPS by 11% annually in the last five years. In the most recent quarter, the company was able to increase its net reported revenue by 1% YOY, whereas EPS fell by 1.5% YOY. However, EPS for the quarter was in line with the estimates. 5% of the total revenue for the company was negatively affected due to foreign currency headwind. Sales volumes for the quarter were strong representing an increase of 4%.

The company has increased its quarterly dividend from 19 cents in 2009 to 25.5 cents in 2012. It currently has a dividend yield of 2.7% and free cash flow yield of 6.5%, which indicate dividends offered by the company are sustainable.

Conclusion
Both PEP and KO are great companies with solid past financial performance. But I believe KO offers investors better investment opportunity than PEP at current valuations. KO has lower PEG compared to PEP, which indicates KO offers cheaper growth opportunity. Also, KO has a lower debt to equity ratio than PEP. However, PEP does have higher dividend yield of 3.1%, but also has higher payout than KO, which means there is still substantial room for dividend increases for KO.

PEP

KO

PEG

4

2.3

5 Years Expected Growth rate (per year)

4.25%

8%

Dividend Yield

3.1%

2.7%

Payout

56%

52%

Debt to Equity

130%

97%

ROE

26%

26%

Source: Yahoo finance

Other than attractive valuations, KO also has higher margins compared to PEP, as shown below in the graph, which supports my thesis that KO is a better investment opportunity than PEP.
(click to enlarge)
Source: Ycharts

Source: Coca-Cola Or PepsiCo: Which Is A Better Investment?