Coke Vs. Pepsi: The Dividend Perspective

Includes: KO, PEP
by: Jefferson Starship

Last Friday’s Wall Street Journal offered a year-in-review quiz for investors to test how many of this year’s headlines they could remember. One of the questions was what major hit did Pepsico (NYSE:PEP) take in the news this year. The answer was that Diet-Coke had surpassed Pepsi as the second highest soda in consumption, behind Coca-Cola (NYSE:KO) at number 1. One of the other multiple choice answers was that the environment-friendly Sun Chips bags are too noisy. That should come as a helpful reminder that half of Pepsi’s revenue comes from potato chips/other food and not beverages. However investors are quick to compare Pepsi and Coke, and rightfully so, since they are the two largest beverage distributors on the planet.

There are endless ways to compare the two companies, both as corporate entities and as stocks. You could look at their product line-ups and you’d see that Pepsi products are all over the grocery store while Coke dominates the beverage aisle. Coke has a stronger international presence. Pepsi may have a slight advantage in healthier products, like Naked Juice which is becoming more and more popular. Stock-wise each are large, well established stocks with long-standing, annually-rising dividends hovering around the 3% yield range. A brief comparison of their fundamentals can be seen below.

Based on these numbers a solid argument could be made for investing in either company; and an even stronger argument for investing both if you are running a long-term dividend portfolio. But assuming these two would be purchased with a long-term dividend growth objective, it is helpful to examine their histories of raising their dividends, and not just the fact that they do it, but by how much. Below is 19 years of dividend payouts for each company, with predictions for 2012. On the right is the percent increase from the previous year and a 5-year average percent increase.

(Click to enlarge)

As you can see Coke’s dividends have slowed down over the last few years, just as they had when the tech bubble burst. Back then it took a few years before the 5-year got back above the 10% mark. The tech bubble did not have as great an effect on the overall economy as the most recent recession so its anyone’s guess as to when we will reach a full recovery and it may be awhile before Coke gets back to their large increases of 2002-2008.

(Click to enlarge)

The yellow highlighted cell represents an unannounced but basically certain dividend, while the orange cells are predictions. The numbers may appear to be off by a quarter but they are set up so that Pepsi’s 4th quarter announcement pays in the 1st quarter. (Their dividends generally pay on the last day of the quarter, but this year it pays on 1/3.)

Pepsi’s dividend increases have slowed down substantially as well. The past two years have increased by less than 7% and that was after a period of large dividend growth from 2004-2008. Picking up Pepsi prior to then would have been a good investment for the dividends but right now there is not much growth and price appreciation slowed to a halt in 2011.

These graphs represent the same data as the charts above and focus only on the percent change from year to year. It helps to show that each had peeks up over 20% but this was mostly short-lived. Ultimately, the next 2 to 3 years should be very telling of the future of the dividends of each of these companies. Both Coke and Pepsi constantly pop up on lists of dividend stocks that you should be holding for a life time and picking between the two may come down to personal preference. The best play may simply be owning both and adding to a position when market swings present favorable prices since the dividends should keep coming for years to come.

Disclosure: I am long PEP.