Pepsi Or Coke: Which Would You Rather Own?

| About: The Coca-Cola (KO)

When picking stocks for your portfolio, you typically run into some trouble. No decision is easy, no matter what kind of goals you have. Whether it's income, growth, speculation, wealth preservation, or a balanced portfolio, decisions come up after narrowing down your "top" selections. "This stock, or that stock? McDonald's or Yum! Brands? Ford or GM?" Believe it or not, this scenario comes up very quickly and leaves many investors scratching their heads. Today I'm looking at Coca-Cola (NYSE:KO) and Pepsico (NYSE:PEP) to see which one belongs in my portfolio.

Both of these beverage companies have become very strong, fundamentally solid brands. To see which is better though, we'll analyze the growth of earnings per share, revenues and the dividend. We'll also look at the key metrics (described in deeper detail later) and valuations by using the P/E and PEG ratios. We'll start with a look at the charts, and for simplicity throughout the article, Pepsi will always be first.

Pepsi 1-Year Chart


Coke 1-Year Chart


As you can see on the charts above, both stocks look a little troubling. In my opinion, Coke's chart looks a little worse, but appears that it will breakout soon, although we don't know the direction. Pepsi just looks like it got a little ahead of itself, but so far, has found strong price support along the 200-day simple moving average and has an upward trending chart.

Pepsi 3-Year Chart


Coke 3-Year Chart


When using the three year weekly charts, the picture becomes a little more clear. Coke appears to trade in these channels for months, before breaking out and forming a new channel. These channels are nice for investors, as they have the opportunity to load up on shares for months at a time, before the stock runs to new highs.

Pepsi however, has been very strong since mid-2011. Before then, it had some trouble and saw a lot of volatility. But from that 2011 low around $57.50, Pepsi has been very strong on its march to the low $70's. Of course, it had several pullbacks, but this is expected. Overall, I think Pepsi has better looking charts than Coke.

Now for a look at growth. First, I'll start with revenue growth and then look at earnings per share (NYSEARCA:EPS) growth. I will use six fiscal years in total: the previous three years (2009-11), the current fiscal year (2012), and the next two year future estimates (2013-14). Below is the table for revenue growth:

Revenues (In Millions):


PEP Revs

Change (%)

KO Revs

Change (%)































(*) = Indicates that these numbers are based off of future estimates for the fiscals years of 2012, 2013 and 2014.

I have some mixed feelings from the chart above. I would own one of these companies based more on consistency, rather than higher growth. When looking at the chart above, Pepsi definitely outperforms Coke in the first three years (2009-11), but not by a lot. However, Coke is forecasted to outperform Pepsi in the next three years (2012-14).

I would hate to make my judgment based solely off estimates. However, Coke does present a better case for more consistency, as well as higher growth in the next three years. With Pepsi expected to post negative revenue growth for 2012, this strikes me as very unappealing. Now let's look at earnings per share growth.

Earnings Per Share:



Change (%)


Change (%)































(*) = Indicates that these numbers are based off of future estimates for the fiscals years of 2012, 2013 and 2014.

Honestly, when looking at the table above, this a hands-down victory for Coke. There are years were Pepsi posted better EPS growth than Coke, such as 2009 and 2010, where Pepsi grew its EPS by 17.4% and 3.97% to Coke's 16.9% and 2%. Since then however, Pepsi has grinded to a halt, posting less than 3% growth in both 2011 and 2012.

This wouldn't matter much if Coke performed about the same. But this is not the case. Coke posted a 20.6% gain in 2011 and an estimated 6.95% gain in 2012. Both of these figures are much better than that of Pepsi's. To take it one step further, Coke is estimated (be careful though, it is after all, only an estimate) to outperform Pepsi over the next two years as well.

In my opinion, these two were pretty even coming in to the EPS debate. In fact, if the EPS comparison even came close, I would probably say Pepsi looks like the better investment so far throughout the analysis. Right now, I have to hand it Coke. But, there are still some metrics I'd like to look at first going forward.

Before analyzing the dividend for each company, I want to discuss the valuation. The valuation of a company is very important because it tells investors how much a company actually costs. Without valuation, investors would think Pepsi is twice the value of Coke, going only by the dollar amount seen for the shares. However, valuation isn't something that could be determined by only looking at the price per share, which is about $37 for Coke and $73 for Pepsi, respectively. Below we'll start with a simple, yet vital measurement: the P/E ratio.

Time Frame



((ttm)) P/E Ratio



2012 P/E Ratio



2013 P/E Ratio



2014 P/E Ratio



As we can see, Pepsi is slightly more valuable than Coke. The lower the P/E ratio, the more valuable a stock becomes. Though it is only by a very small amount, Pepsi still nudges Coke as a more valuable company, in terms of how much it costs per share, with respect to how much money the company makes.

To take this one step further, let's analyze the PEG ratio. Like the P/E ratio, the PEG ratio attempts to measure a company's value. Only with this ratio, it measures the company's valuation with respect to its growth. The equation is derived by taking the P/E ratio and dividing it by the annual EPS growth, which is something we did earlier in the analysis. Below are the results for the 1-year, 2-year and 5-year PEG ratios:

Time Frame Pepsi PEG Ratio Coke PEG Ratio
2013 PEG 1.955 2.01
2014 PEG 2.33 1.70
2017 PEG 4.13 2.30

Note: The 5-year figures are taken from Yahoo! Finance.

For the PEG ratio, a reading of 1 would indicate a fair priced stock. A reading under 1 would indicate a potentially undervalued stock and a reading over 1 would indicate a potentially overvalued stock. What we are comparing here is which company has a lower PEG ratio. The 1-year PEG ratio suggests that Pepsi is more undervalued than Coke, relative to its 1-year growth. However, the valuation is skewed in Coke's favor when looking beyond the scope of 1-year, as the 2-year and 5-year figures for Coke are lower than that of Pepsi.

A very important factor for both of these companies is the dividend. Not simply which one has a higher yield or a higher payout, but which company grows the dividend most consistently as well. Below I have a chart dating back 10 years, to see which has had the better dividend over that time frame. Below are the results:

Year PEP Dividend ($) Change (%) KO Dividend ($) Change (%)
2003 .63 5.8% .44 10%
2004 .85 34.9% .50 9.1%
2005 1.01 18.8% .56 12%
2006 1.16 14.85% .62 10.7%
2007 1.425 22.8% .68 9.7%
2008 1.65 15.8% .76 11.75%
2009 1.775 7.5% .82 7.9%
2010 1.89 6.5% .88 7.3%
2011 2.025 7.15% .94 6.8%
2012 2.13 5.2% 1.02 8.5%

Pepsi has an overwhelming dominance when it comes to the dividend, at least in the last ten years. The most impressive years came from 2004 to 2008, where the lowest dividend growth figure was 15.8%. When looking at the table, you'll notice that Coke didn't have one year with as much as 15.8% growth! That's not to say Coke couldn't have paid it, but it is to say that Pepsi has had better growth in the past decade.

However, since 2009, Coke has been about equal in terms of dividend growth. In 3 of the past 4 years, Coke has actually had better growth than Pepsi. Both have paid dividends for a very long time, (since 1952 for Pepsi and since 1920 for Coke). Overall, the dividend strength belongs to Pepsi in my opinion.

But, it's close though, that's for certain. Pepsi has had much stronger growth in the dividend in the previous decade but Coke has been much more consistent. I gave the "win" to Pepsi for its past dividend growth in the last ten years, but looking forward into the next 10 years, I feel more comfortable going with Coke's dividend. It seems to grow at a more consistent rate (between 7-12%) and has been around longer.

One last look at some key metrics will help determine which investment I would prefer over the other. These metrics are things I consider very important and certainly can help investors choose the right company for their goals and needs. Below are the metrics:

Key Metric Pepsi Coke
Long-Term Debt $23,732 Million $16,181 Million
Short-Term Debt $4,211 Million $16,208 Million
Total Debt $27,943 Million $32,389 Million
Dividend (Annually) $2.16 $1.02
Yield 2.99% 2.77%
Market Cap $111B $166.5B

The above table can help aid investors who may be on the fence as to which company to invest in. As you can see, the dividend yields are quite close for the two companies, with Pepsi edging out Coke by 20 basis points. Even total debt is quite close between the two companies. A company's debt level can be found the on the balance sheet and is available on most finance sites, such as Google Finance or Yahoo! Finance.

Debt isn't necessarily a bad thing, and often times it's not at all. It is something that investors should be aware of however, and keep an eye on. The big difference in the table above is the market cap. Coke's $166.5 billion market is much larger than Pepsi's $111 billion market cap. There's not really a "winner" when it comes to market cap, but again, just a metric you should be aware of. It can be helpful when looking at something such as debt levels. Coke has slightly more debt than Pepsi, but is also a much larger company, so this makes sense.

Final Thoughts

For me personally, I prefer Coke. I am already long shares of Coke, but I didn't let that play a role in my objective to find which company was a better investment. I'm always trying to perfect my long-term holdings, and if I felt Pepsi was a better candidate, I would have swapped them out. At the very least, I would've added Pepsi if I thought it was as good as Coke.

There's nothing wrong with owning both companies. Just like there's nothing wrong with owning McDonald's (NYSE:MCD) and Yum! Brands (NYSE:YUM), or Visa (NYSE:V) and Mastercard (NYSE:MA). Coke and Pepsi are two companies you could easily own together.

However, if you're going to just own one, I would pick Coke. The future growth appears to be stronger, the growth is more consistent, the dividend growth is lower but more consistent than that of Pepsi's and the debt load is smaller as well. For those reasons, I would -- and did -- choose Coke as the preferred company to own. I will continue to analyze Pepsi to see if a long-term position is warranted.

Disclosure: I am long KO, MCD, V, MA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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