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Coca-Cola (KO) is the world's largest non-alcoholic beverage company. The stock currently trades for $72.87 and has a projected yield of 2.8%.

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PepsiCo (PEP) also sells non-alcoholic beverages, but derives about 50% of its revenue from food. The stock currently trades for $65.35 and has a projected yield of 3.15%.

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Which of these beverage behemoths offers the best value for dividend investors? Let's look at the historical dividends for both companies.

Coca-Cola

YearDividendGrowth
2002$0.8011.11%
2003$0.8810%
2004$1.0013.64%
2005$1.1212%
2006$1.2410.71%
2007$1.369.68%
2008$1.5211.76%
2009$1.647.89%
2010$1.767.32%
2011$1.886.82%

PepsiCo

YearDividendGrowth
2002$0.595%
2003$0.635.88%
2004$0.8534.92%
2005$1.0118.82%
2006$1.1614.85%
2007$1.42522.84%
2008$1.6515.79%
2009$1.7757.58%
2010$1.896.48%
2011$2.0257.14%

In the last three years, dividend growth has been very similar for both companies. Let's look at the historical payout ratios. I will use percentage of the free cash flow instead of earnings to determine the payout ratio.

Coca-Cola

YearFree Cash Flow (Mil $)Float (Mil Shares)Payout Ratio
2002$3,8912,48351.05%
2003$4,6442,46246.65%
2004$5,2132,42946.60%
2005$5,5242,39348.52%
2006$4,5502,35064.04%
2007$5,5022,33157.62%
2008$5,6032,33663.37%
2009$6,1932,32961.68%
2010$7,3172,33356.12%
2011$6,5542,32366.63%

PepsiCo

YearFree Cash Flow (Mil $)Float (Mil Shares)Payout Ratio
2002$3,1901,78933.37%
2003$2,9831,73936.73%
2004$3,6671,72340.08%
2005$4,1161,66940.95%
2006$4,0161,68648.70%
2007$4,5041,65652.39%
2008$4,5531,60558.16%
2009$4,6681,57759.97%
2010$5,1951,61458.72%
2011$5,6051,59757.70%

The payout ratio for both companies have been very similar over the last three years, around 60%. This is higher than the historical values for both companies.

Valuation

I will use the Dividend Discount Model to put an estimated value on both companies. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 8% next year for both companies, and then let that growth rate decay over 20 years to a perpetual growth rate of 3%, as per the growth table below.

YearCoca-Cola Dividend Growth RatePepsiCo Dividend Growth Rate
20128.51%*8%
20137.75%7.75%
20147.5%7.5%
20157.25%7.25%
20167%7%
20176.75%6.75%
20186.5%6.5%
20196.25%6.25%
20206%6%
20215.75%5.75%
20225.5%5.5%
20235.25%5.25%
20245%5%
20254.75%4.75%
20264.5%4.5%
20274.25%4.25%
20284%4%
20293.75%3.75%
20303.5%3.5%
20313.25%3.25%

*Coca-Cola has already announced dividends for 2012

Using these parameters, I arrive at an estimated fair value of $57.53 for Coca-Cola and $61.68 for PepsiCo. Coca-Cola is trading at a 26.67% premium to its estimated fair value while PepsiCo is trading at a 5.95% premium to its estimated fair value.

Conclusion

According to this dividend-based valuation, Coca-Cola is overvalued by over 25% while PepsiCo is trading much closer to its estimated fair value. PepsiCo is clearly the better option for dividend investors, offering a much better value than Coca-Cola.

Source: Why PepsiCo Is Better Than Coke For Dividend Investors