Blue chip stocks with moderate growth expectations and a modest dividend yield are essential in any long-term portfolio. The Coca Cola Company and PepsiCo are both reputable companies and can be good stocks for an investor to own. In this article, I explain how Coca Cola and PepsiCo are both great companies, but Coca Cola is a better stock to buy in today’s market.
The Coca Cola Company (KO) sells the concentrates and syrups for a long line of beverages including Coca Cola, Sprite, and Fanta. They are a truly global company and continue to invest in developing countries. They have a market cap of about $150 billion. Their competitive advantages are their strong brand, which is considered to be the most valuable brand on the planet, and their access to distribution channels all around the world. They boast a 2.8 percent dividend yield and trade at a P/E ratio of 12.5, meaning that most of their earnings are still being reinvested into the company. Coca Cola has consistent revenue growth and earnings growth and is expected to grow in both revenue and earnings over the next two years. They also operate at very high profit margins. With $12.7 billion in revenue in their quarter ending July 1st, 2011, they managed to have $7.7 billion in gross profit, and $2.8 billion in net income. A high profit margin is important for a long-term portfolio because there is a better chance that they will have positive earnings in the event of an economic catastrophe.
PepsiCo (PEP) sells beverages as well as the Frito Lay and Quaker lines of foods. PepsiCo has a very large portfolio of products and has a market cap of about $98 billion. They have a 3.32 percent dividend yield and a P/E ratio of 15.8 so they are still reinvesting earnings into the business. They have had fairly consistent revenue and income growth over the past few years and are expected to grow in both revenue and earnings over the next two years. PepsiCo is also a truly global enterprise and generates their competitive advantage from its brand power and distribution channels. About 42 percent of PepsiCo’s revenue comes from outside the United States and they still have a lot of room for expansion with their international businesses.
PepsiCo and Coca Cola are two very similar companies with very similar business models. PepsiCo consistently posts higher revenues than Coca Cola, but Coke tends to beat PepsiCo in earnings, which is why Coca Cola’s market cap is about 50 percent higher than PepsiCo’s. Coca Cola’s earnings are projected to grow by 11.2 percent and 10.8 percent in 2011 and 2012, respectively while PepsiCo’s are projected to grow by 7.7 percent and 9.2 percent in 2011 and 2012.
I believe that Coca Cola is a better investment than PepsiCo right now because Coca Cola trades at a lower P/E ratio than PepsiCo and is expected to grow faster than PepsiCo over the next two years. Coke is also investing $4 billion in Asia over the next three years and I believe that this investment will have a huge return.
Both Coca Cola and PepsiCo are great investments for a long-term portfolio. They have expected growth, strong margins, and sustainable competitive advantages. Coca Cola is slightly more undervalued than PepsiCo, but both will provide solid, predictable returns over the next few years, which is very comforting in the unstable market we are currently experiencing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
