- Coca-Cola and PepsiCo are both Dividend Aristocrats that currently pay identical yields.
- Both companies have a strong history of returning value to shareholders.
- PepsiCo has outperformed Coca-Cola by a wide margin in a variety of metrics and is likely to continue doing so.
I have previously written a couple of articles (here and here) detailing several reasons as to why long term investors should have Coca-Cola (NYSE:KO) included in their portfolios. In this article, I will be reviewing reasons as to why long term investors should have PepsiCo (NYSE:PEP) in their portfolios as well.
When discussing Coca-Cola, Warren Buffett often comes to mind. Considered by many as one of the world's greatest investors, his investment in Coke in the late 1980's is one of the main factors attributed to his 'greatness'. But I wonder if people would regard Buffett any differently had he purchased Pepsi instead?
Looking at the chart below, you can see that both companies over the long run have performed nearly identically.
When you look at total returns, the difference between the two companies remains marginal.
So even though the total returns of the two companies are very similar since the time in which Buffett purchased Coca-Cola, I believe the world would view him differently in general had he purchased PepsiCo instead. For one main reason: timing. While both companies have seen similar returns, the majority of Coca-Cola's returns came in those first 10 years, while PepsiCo has outperformed Coca-Cola steadily since then.
So, while Buffett's investment looked great in 1998 (and truthfully still looks good today), Coca-Cola hasn't really been all that impressive since 1998.
Not only, has Coca-Cola been outperformed (by a wide margin) by Pepsi, it also has been outperformed (by a wide margin) by the S&P 500.
When looking at total returns, Coca-Cola has still underperformed the market in general since 1998.
Another reason that many investors like Coca-Cola is because of its ever growing dividend. As a member of the Dividend Aristocrats, the company has raised its dividend every year since 1963. But let's not forget that PepsiCo is also an Aristocrat and has raised its dividend every year since 1973.
Both companies currently pay identical yields of 2.90%, but it has actually been PepsiCo that has grown its dividend at a higher rate. Over the past ten years, PepsiCo has grown its dividend significantly higher than Coca-Cola's.
When stretching it out further, the difference in dividend growth becomes even greater.
With a lower and more consistent payout ratio, I see no reason as to why PepsiCo's dividend growth will not continue to outpace Coca-Cola's over long periods.
When looking at revenue and earnings over the past year, PepsiCo has performed better in both areas.
When looking at revenue and earnings over the past five years, PepsiCo has seen the better revenue, while Coca-Cola has seen the better increase in earnings.
When looking at revenue and earnings over the past ten years, PepsiCo has the better growth in both areas compared to Coca-Cola.
EPS estimates for the future are very similar for both companies.
In addition to the greater dividend growth along with the better revenue/earnings growth over the past ten years, PepsiCo also offers added diversity that Coca-Cola does not, due to the fact that a good amount of PepsiCo's sales come from its snack food brands.
I feel that both Coca-Cola and PepsiCo are both great companies that will reward long-term shareholders. I currently have a small position in Coca-Cola and will be looking to start a position in PepsiCo at some point in the next twelve months.
Looking at the chart below, you can see that PepsiCo's trailing/forward PE ratios are within their average ranges based on prior history.
While I do believe that investors may find a better entry position with a downturn in the market, I do not feel that long term investors should hesitate in adding PepsiCo to their portfolios. As always, I suggest individual investors perform their own research before making any investment decisions.