Sparkling Dividends Face-Off: Coca-Cola vs. Pepsi

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Includes: KO, PEP
by: Efsinvestment

The battle between PepsiCo (NYSE:PEP) and Coca-Cola (NYSE:KO) is world famous. Both companies are among the world's largest beverage suppliers. Their products, distribution locations, customers, even advertising campaigns are very similar. In fundamental economics we exemplify Coke and Pepsi as perfect substitutes to each other. They are both producer and retailer of carbonated and non-carbonated beverages. Surprisingly, both companies have market caps right above $110 billion. However, their past performance, current fundamental ratios, and future estimations are slightly different. Here is a brief analysis of Pepsi and Coca-Cola (data from Finviz):

PepsiCo manufactures foods, snacks, carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). PepsiCo Europe division operates in the food and beverage sectors in Europe. Pepsi’s most famous brands include, but not limited to, Frito Lay Snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices, and Quaker foods. The company was founded in 1898 and is currently headquartered in Purchase, New York. (The original formula was developed in Bern, North Carolina) Pepsi has most of its bottling infrastructure in North America, but distributes to stores internationally through independent bottlers.

The current P/E ratio stands at 19.12, but forward P/E falls to 14.55. Dividend yield is 2.89%, and the company is trading 5.14 times the book value. The gross margin is 54.38%, whereas net margin falls to 10%. SMA50 is 6.65%, whereas SMA200 is 9.63%. The stock is up by 18% in the last 2 months, and is currently in a high upside momentum. If the momentum keeps up, shares will soon reach the UBS target price of $76.

The Coca-Cola Company manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. Its primary businesses are sparkling and still beverages. The company's sparkling beverages include nonalcoholic beverages with carbonation, such as energy drinks, carbonated waters and flavored waters. Its still beverage portfolio includes nonalcoholic beverages without carbonation, noncarbonated waters, flavored and enhanced waters, noncarbonated energy drinks, juice drinks, teas and coffees, and sports drinks. The Coca-Cola Company also offers fountain syrups and concentrate. It markets its nonalcoholic beverages firstly through the Coca-Cola, Diet Coke, Fanta, and Sprite brands. The Coca-Cola Company was founded in 1886 and is headquartered in Atlanta, Georgia.

Coca-Cola has a ttm [trailing twelve month] P/E ratio of 13.21, whereas the forward ratio falls to 15.96. Note that the balance sheet has a one-time asset sale profit of $4.5 billion. That is probably why the P/E ratio is below the historical value. Insiders own 0.61% of the company and they increased their holdings by 3.87% in the last 6 months. Coke has a low Beta value of 0.6.

Historical Comparison (Data from Morningstar):

2007

2008

2009

2010

TTM

P/E

PEP

22.30

17.10

16.10

16.70

19.10

KO

23.90

18.20

19.5

13

13.2

P/B

PEP

7.1

7.1

5.7

4.9

5.1

KO

6.5

5.1

5.3

4.9

4.9

P/S

PEP

3.2

2

2.2

1.8

1.9

KO

5

3.3

4.3

4.4

4.2

P/CF

PEP

18.1

12.5

14.1

12.5

13.4

KO

20

14

16,2

16,1

18,5

Dividend Yield

PEP

1.88%

3.01%

2.92%

2.89%

2.79%

KO

2,22%

3,36%

2,88%

2,68%

2,65%

Gross Margin

PEP

54.30%

52.90%

53.50%

54.10%

54.40%

KO

63.90%

64.40%

64.20%

63.90%

63.00%

Net Margin

PEP

14.30%

11.89%

13.75%

10.93%

9.90%

KO

20.73%

18.18%

22.02%

33.63%

31.74%

Click to enlarge

The analysis of past data shows that the fundamental ratios of both companies have been pretty stable. Both companies were only slightly affected by the financial crisis. It is obvious that shareholders tend to be long-term oriented. 2011 looks like it will be a good year for PEP, where profits will be higher. The forward P/E ratio of 14.55 confirms the better future of PEP shares.

While PEP's gross profit margins hover around 53%, the net margins are much thinner, and ttm [trailing twelve month] net profit margin falls to 9.90%. KO’s gross profit margins hover around 63%, the net margins are also lower and ttm net profit margin falls to 34%. Again, it is worth stating that Coke has a one-time profit from asset sales. If we exclude this profit [$4.5 billion], net profits will fall to $6.8 billion, implying a past year P/E ratio of 22. At the same time, analysts have optimistic expectations for this year. The forward P/E of 15.96 implies that net profit is expected to be $9.75 billion, this year.

Summary

Since both companies' fundamental metrics are so similar to each other, it is very hard to choose between the two. Both companies operate in the same business area, but in my opinion KO's stock has more of a margin of safety than PEP. Moreover, Coca-Cola has better brand recognition, and more global exposure than Pepsi.

The company is improving its profitability, increasing net earnings and boosting cash flow. The stock currently trades with a trailing P/E of 13.21, and forward P/E ratio of 15.9. Analysts estimate an EPS growth of 8.93% for the next 5 years.

However, in the past 5 years EPS growth was 20%. I think an EPS growth of 15% will be more reasonable for Coke. The metrics above will give Coca-Cola a T-Metrix score of 6, whereas Pepsi has a score of 4. The company has strong back-up of Warren Buffett, and top 5 institutions increased their shares by 88 million shares. That is why I believe it should be considered among the top dividend picks for the next 5 years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.