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