I really like to drink Pepsi, but would it be wise to invest in PepsiCo (PEP), the company that produces my favorite beverage? To find out, I will be comparing Pepsi to its biggest competitor, Coca-Cola (KO). I will be using financial data from the PepsiCo and Coca-Cola Investor Relations websites.
All graphs in this article were made by me, using Microsoft Excel.
I will be comparing both companies on revenue growth, earnings growth, profit margin, dividend growth, payout ratio and valuation. After this, I will decide which of the two would be a better addition to my portfolio.
Looking at the revenue-graph, we can clearly see PEP's revenue is a lot higher than KO's. In 2012, PepsiCo had revenues of $65.5 billion, while KO only had $48.0 billion.
The next graph shows the growth or decline in revenue over the years for both companies.
Average year-on-year revenue growth between 2003 and 2012 was 10.14% for KO, and 10.75% for PEP. KO's revenue went from $20.9 billion in 2003 to $48.0 billion in 2012, while PEP grew its revenue from $27.0 billion to $65.5 billion in the same timeframe.
Net Income and Profit Margin
KO has been able to grow its net income at a much higher rate than PEP over the last 10 years. In 2003, KO had a net income of $4.3 billion, while PEP was at $3.6 billion. By 2012, PEP's revenue had grown to $6.2 billion, but KO managed to get $9.0 billion of net income.
So, despite the fact that PEP sells more products, KO still beats PEP in terms of earnings. The graph below shows the profit margin for both companies, divined as net income/revenues.
I've added the averages for the 2003-2012 period, which is 21.71% for KO, against only 12.62% for PEP. KO clearly beats PEP in this section.
EPS and Dividend
I like reliable, growing dividends, so I'm looking for a decent YoY dividend growth, combined with a stable payout ratio.
Note: KO split its stock 2 for 1 in 2012. Therefore, in the graph below, I have divided KO's EPS and dividend by 2.
KO's EPS has grown by 122% between 2003 and 2012, with its dividend increasing by 131%, thus keeping the payout ratio at a reasonable level. KO's payout ratio has been in the 50-60% range for most of the last ten years.
Valuation and conclusion
Based on 2012 earnings, KO and PEP have almost identical P/E ratios, with a P/E of 19.36 for PEP and 19.68 for KO. Dividend yields are also almost the same, at 2.83% for PEP, and 2.89% for KO.
Over the ten year period researched in this article, PEP has had a slightly higher YoY revenue growth, and a dividend growth rate that is far above KO's. However, based on the fact that PEP's profit margins appear to be dropping further each year, and its net income is growing at a much slower pace than KO's, I'd prefer KO over PEP.
I will be buying KO when it drops down a bit further from its 52-week high.