Taste Test: PepsiCo, Inc (PEP) Is Better Than The Coca-Cola Co. (KO)

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Shares of a certain globally popular carbonated drink made with corn syrup and caramel color have been on a tear of late.

Taste Test: PepsiCo, Inc (PEP) Is Better Than The Coca-Cola Co. (KO)Oh, and The Coca-Cola Co (KO) hasn’t done all that badly either.

PepsiCo, Inc (PEP), not Coca-Cola, has been the better soda stock for some time now. Over the last five years, Pepsi stock has returned 53%, well ahead of the 35% return in Coke stock. In the last two years, PEP is up more than 21%, while KO has returned less than 13%.

Coca-Cola has long been hailed as one of the market’s most reliable blue-chip stocks, primarily because of its generous yields and long history of annual dividend growth, now going on 54 years straight.

But PepsiCo has never been a slouch in the dividend category, having upped its payout for 43 consecutive years. And its current yield (2.7%) nearly matches Coca-Cola’s (3%).

Both companies’ sales are slipping: PepsiCo’s have declined year-over-year in each of the last five quarters, while Coca-Cola’s have slipped in each of the last three. Both also report first-quarter earnings next week, so stay tuned.

One advantage the two soda stalwarts have over other, smaller competitors is that they’re diversified. PepsiCo counts Frito-Lay, Quaker Oats, Tropicana and Naked Juice among its many, varied subsidiaries. Coca-Cola owns Vitamin Water, Minute Maid, Honest Tea and Odwalla.

In an era in which there’s a war on soda — New York City tried to ban sugary drinks larger than 16 ounces, and some nutritionists have compared diet sodas to cocaine — sales at soda companies have been slipping, and not just at Coca-Cola and Pepsi. Sales at places like SodaStream International Ltd (SODA) and Jones Soda Co. (USA) (JSDA) have also been in steady decline the last few years.

PepsiCo Less Dependent on Soda Than Coca-Cola

These days, if you’re a company that sells soda, it’s good to have a backup plan, and PepsiCo does with its Frito-Lay, Quaker Oats, Tropicana and other businesses. A company like, say, Dr. Pepper Snapple Group Inc. (DPS) is more heavily leveraged to harmful sugary drinks.

Coca-Cola remains top dog, with the greater and faster-growing share of the global soda market. But I think Pepsi stock is the better long-term buy, and here’s why: it’s less dependent on soda sales than Coca-Cola. Soda accounted for only 47% of PepsiCo’s global sales in 2015; food and other non-soda items accounted for the remaining 53%.

Coca-Cola, on the other hand, still derives 75% of its global sales from its myriad soda brands, which include Coke, Diet Coke, Coke Zero, Sprite and Barq’s.

Coca-Cola simply doesn’t have a solid food backup to fill the void created by ever-declining soda sales. With nearly $20 billion in cash in its coffers, Coke has the money to acquire a major food brand, but that brand would be hard-pressed to match Frito-Lay, which in addition to Fritos and Lay’s produces such top-selling brands as Doritos, Cheetos, Tostitos, Ruffles, Smartfood, Sun Chips, Rold Gold, Cracker Jack and Stacy’s — basically a who’s who of the most popular and recognizable chip brands.

All told, Frito-Lay brands “chipped” in 23% of PepsiCo’s net revenue last year.

Unlike with soda, the largest cities in the world aren’t trying to ban chips yet. And brands such as Quaker Oats and Tropicana — basically oatmeal and orange juice, which have long been considered healthy choices that you’d be willing to let your kids eat – give PepsiCo another leg up in the area of food and noncarbonated beverage.

Pepsi Stock the Safer Buy

That’s why, as soda sales continue to slip, I think PepsiCo stands the better chance of returning to overall growth in the coming years.

As a result, Pepsi stock — up 8% in the last three months and trading well above its 50-day moving average — is a safer long-term buy than Coca-Cola.

As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/pepsico-pep-pepsi-stock/.

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