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A Tale Of Two Stocks -Coke Vs Pepsi

Jul. 15, 2020 3:12 PM ETThe Coca-Cola Company (KO), PEP
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  • When times are tough, diversification is key.
  • Dividends reward patient investors handsomely.
  • The Last 5 years has been kind to Shareholders of both Coke and Pepsi; however, Pepsi shareholders can take a victory lap.

The duopoly of Pepsi and Coke is indisputable. They are worldwide and have some of the most recognizable brands on the planet. If you were fortunate enough to own these companies for a long time, you’ve had amazing returns.

Coca-Cola (KO) stock is trading in the mid-40’s with a 3.6% dividend yield. The market cap is 194 Billion. In 2019 Coke had over 10 Billion in operating cash flow. In 2018, Coke had more than 7.5 Billion in operating cash flow. The business is extremely profitable in a normal year. Today Coke is facing challenges selling its product due to COVID-19. The company is reliant on restaurants and events to drive a large portion of sales.

Pepsi (PEP) stock is $134.91 today with a 3.06% dividend yield. The market cap is 187 Billion. In 2019 Pepsi had over 9.5 Billion in operating cash flow. In 2018 Pepsi had just under 9.5 Billion in operating cash flow, and in 2017 Pepsi had almost 10 Billion in operating cash flow. Just like Coke, Pepsi is facing challenges on selling soda. COVID-19 has impacted Pepsi but not to the same extent it has impacted Coke.

Pepsi has more diversified offerings. Pepsi’s food division includes Lays, Doritos, Quaker Oats, Cheetos, Tostitos, Ruffles, and White Cheddar Smartfood Popcorn. Being less reliant on drinks helped Pepsi significantly for the second quarter while Soda sales have been down. Coke diversified into tea and coffee but hasn’t diversified out of drinks or into different channels. Coke is relying on the away from home business to a greater extent than Pepsi. The Coke horizon two pipeline is not as appealing and as the pandemic resolves, executives should be looking how to leverage their process and supply-chain in tangential businesses.

Past Performance

The ability of Pepsi’s management team to add value has been undeniable. The company has created substantial value for shareholders. If you bought Pepsi stock in 2015, you’re up 34% on share price and 18.7% on dividends to combine for a gain of 52.7%. Shareholders of Coke have less to celebrate with a share price increase of 12% and a gain on dividends of 20.1% to combine for a gain of 32.1%.

You can’t go wrong investing in Pepsi or Coke but Pepsi has an edge of the long-run. Pepsi’s growth in stock price and their increasing dividend makes it challenging to value Coca-Cola stock equally.

5 year chart of stock price, Coke vs Pepsi

Neither Pepsi nor Coke are seen as a growth story. But what they are growing is their dividend. Annually, Coca-Cola has been raising its dividend. Coke has raised its dividend every year since 1957. Pepsi has paid its dividend every quarter since 1965. Since 2015, the dividend growth rate is a strong argument for Pepsi.

Year over Year Dividend Growth, Coke vs. Pepsi

As a long-term play, both Coke and Pepsi are great options. Pepsi has better diversification with its Horizon Two product, snack foods. Coke’s stock price is depressed and is going to remain depressed throughout COVID-19 but people aren’t going to stop drinking their products. Once restaurants rebound both of these stocks will see an uptick in Soda sales, however Pepsi has the edge due to its better track record on providing shareholder value.

Analyst's Disclosure: I am/we are long PEP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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