While still generating positive returns for investors, longtime competitors Coca-Cola (NYSE: KO) and PepsiCo (NASDAQ: PEP) have underperformed the market benchmark S&P 500 over the past five and 10 years. Both beverage giants have faced slowing demand for their core products, leading to acquisitions in an effort to diversify. Given those two factors, it's a prime opportunity to check in on these two bellwether stocks to see which one stands out as a potential candidate to generate outsized returns moving forward.
Which companies have Coca-Cola and PepsiCo recently acquired?
While Coca-Cola and PepsiCo are rooted in their namesake beverages, the companies' worldwide distribution network has allowed them to expand their offerings and grow by acquisition.
Over the last decade, Coca-Cola's notable acquisitions include the sparkling water brand Topo Chico for $220 million, the coffee company Costa for $4.9 billion, and the sports and hydration beverage company BodyArmor for $5.6 billion.
Meanwhile, PepsiCo has zeroed in on energy drink makers of late, acquiring Rockstar Energy for $3.85 billion in 2020 and investing $550 million in Celsius Holdings in 2022.
Both companies have successfully stabilized their net sales in part due to recent acquisitions. Looking at the numbers, Coca-Cola generated net sales of $46.5 billion over the trailing 12 months. That is a significant improvement from its annual net sales low of $33 billion in 2020, and just 3% off its annual net sales high of $48 billion in 2012.
Comparatively, PepsiCo's net sales rebounded much faster after a stagnation period in the mid- to late 2010s. Over the trailing 12 months, PepsiCo generated $92.1 billion in net sales, representing an all-time high for any 12-month period and a 41% increase from its 2012 net sales of $65.5 billion.
KO Revenue (TTM) data by YCharts.
Is Coca-Cola or PepsiCo stock cheaper?
Despite PepsiCo's net sales being nearly double those of Coca-Cola, it has a smaller market capitalization of $243.9 billion compared to Coca-Cola's $306.8 billion. That's because Coca-Cola is more profitable, thanks to its higher gross margin and operating margin . Over the last 12 months, Coca-Cola generated $9.1 billion in free cash flow , while PepsiCo produced $7 billion.
Another factor contributing to PepsiCo's lower market capitalization is its higher debt burden. PepsiCo holds $38.3 billion in net debt , whereas Coca-Cola has $24.8 billion. However, it's important to highlight that Coca-Cola recently paid $6 billion in back taxes and interest to the IRS, related to a 17-year-old tax case, which is not factored into its $24.8 billion net debt.
Excluding the tax payment, Coca-Cola's debt has decreased by 15.8% over the past five years, while PepsiCo's has surged by 42.9%. This has resulted in a higher interest expense for PepsiCo -- $854 million in the past 12 months, compared to Coca-Cola's $545 million.
In terms of valuation, Coca-Cola is slightly better priced. Its price-to-free cash flow ratio is 34, compared to PepsiCo's 35.2, making Coca-Cola the cheaper stock.
KO Price to Free Cash Flow data by YCharts.
Is Coca-Cola or PepsiCo more shareholder-friendly?
For mature companies like Coca-Cola and PepsiCo, investors generally seek to distribute profits through dividends and share repurchases . Both beverage giants have moderate share repurchase strategies, with Coca-Cola and PepsiCo reducing their share count over the past five years by 0.6% and 1.5%, respectively. Instead, both Coca-Cola and PepsiCo prioritize consistent and rising dividends.
Currently, Coca-Cola pays a quarterly dividend of $0.485 per share, representing a dividend yield of 2.7%. The stock is in the exclusive Dividend Kings club, having paid and increased its dividend for at least 50 consecutive years. Coca-Cola's streak currently stands at 62 straight years.
PepsiCo is also in the Dividend Kings club, having paid and raised its dividend for 52 consecutive years. Today, PepsiCo pays a quarterly dividend of $1.35 per share, equating to a 3% dividend yield.
With any dividend stock, investors should key in on its payout ratio , which calculates the percentage of a company's earnings paid out as dividend income. Coca-Cola and PepsiCo have relatively high payout ratios at 75.6% and 73.4%, respectively. Neither payout ratio is overly concerning, but management for each company will likely feel obligated to raise it annually given each stock's Dividend King status. As a result, debt levels and outstanding shares will be slow to decrease.
Overall, both stocks are a dividend seeker's dream. Still, PepsiCo has the slight edge of being more shareholder-friendly, with a higher dividend yield and lower payout ratio than Coca-Cola.
Is Coca-Cola or PepsiCo the better stock to buy?
Neither Coca-Cola nor Pepsi should be considered growth companies, nor should it be expected that their stocks outperform the S&P 500 without any further significant acquisitions. However, these stocks are stalwarts for any income-seeking portfolio due to their steady profits and histories of growing dividends.
When deciding which stock is the better buy today, Coca-Cola edges out PepsiCo due to its valuation and stronger balance sheet, making it the preferable choice for dividend investors.
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Collin Brantmeyer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy .
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