New Turf for the Epic Coke and Pepsi Face-Off

Coca-Cola versus Pepsico

Coca-Cola (KO) is a global manufacturer and distributor of non-alcoholic beverages. PepsiCo (PEP) is a global food and beverage company. Coca-Cola’s operating income has shown a declining trend for the past four years, but its operating margin has remained in the low-20% range for the past four years.

Meanwhile, Coca-Cola has maintained a net margin between 15%–16% for the past two years, and the beverage giant has generated sufficient free cash flow to pay off its dividends for the past four years. It has also initiated share buybacks every year for the past four years.

New Turf for the Epic Coke and Pepsi Face-Off

Notably, Coca-Cola’s dividend per share growth rate has picked up since 2014 and has maintained an average growth of 8% for the past two years. Coca-Cola (XLP) (FSTA) (VDC) has a current dividend yield of 3.3% and a forward PE (price-to-earnings) ratio of 21.7x.

PepsiCo, by comparison

PepsiCo recorded growth in operating income for 2016 on the back of an increase of 2.3 percentage points in its operating margins. PepsiCo also managed to record growth in net income, despite rising interest expenses. Its net margin shows a rise of 1.4 percentage points.

The company has always generated ample cash flow to pay off its dividends, despite rising capital expenditures. PepsiCo has also initiated share buybacks every year for the past four years. PepsiCo has recorded a CAGR (compound annual growth rate) of 8% in its annualized dividend per share over the past four years. The company has consistently increased its dividend per share, going back as far as 2001. PepsiCo has a current dividend yield of 2.7% and a forward PE ratio of 19.8x.

Vulnerabilities

That said, both these beverage giants remain vulnerable to sales declines due to the growing health consciousness around the whole world. For this reason, both companies have come out with healthier drink options via acquisitions and launches of new, exclusive products. These initiatives have led to earnings declines, however, given the costs of switching over from their traditional businesses, wherein they had been market leaders.

New Turf for the Epic Coke and Pepsi Face-Off

What’s the takeaway from this epic rivalry today? With rising health consciousness and the recent shift in global drinking patterns, it appears that it will take time for Coca-Cola and PepsiCo to get back to their previous form, and so earnings declines are likely to continue taking tolls on both companies’ dividend growth.

Coca-Cola and PepsiCo likely need to monitor their debt levels to prevent increasing interest costs from eating away too much at their net incomes. Both beverage giants have recorded positive segment revenue, earnings, and cash flow, however, and right now it appears that PepsiCo has a better valuation than Coca-Cola—in addition to a more favorable profitability and a more stable earnings growth rate. Coca-Cola and PepsiCo have recorded growth of 5.7% and 7.1% in dividends per share in 1Q17, respectively.