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For example, KO trades at 24 times its forward price-to-earnings ratio. It also is valued at 25.1 times enterprise value to EBITDA. By contrast, PEP trades at 23 times earnings and has an EV-to-EBITDA ratio of 17.1.
Another example is that the market values KO stock’s enterprise value at 8.2 times its sales, whereas PEP is at 3.4 times EV-to-sales.
Differences with Dividends and Yields
KO stock has a slightly higher dividend yield than PEP. Coca-Cola stock yields 2.9% and PepsiCo’s yield is 2.8%.
However, KO spends more of its earnings on dividends, paying out 77.4%. PEP pays out only 68.4 % of its earnings-per-share in dividends.
If PEP paid out 77.4% in dividends like KO, its dividend per share would be 13.1% higher — $4.32 annually. So at today’s price of ~$136.36, PEP’s dividend yield would be higher than KO’s — 3.17% vs. KO stock’s 2.94%.
Moreover, KO has grown its dividends at only 6.85% during the past five years. PepsiCo dividends have grown faster at 9.88% over the same period. And remember PEP pays out less of its earnings, so its growth rate would be even higher on a comparable payout basis.
PEP’s Total Return Has Been Better Than KO, Despite Being Cheaper
Normally you would think that since KO stock is more expensive than PEP its stock performance would have been better than PEP’s. But over the past year, KO stock has risen 19% and PEP has risen 20%. So PEP has outperformed Coca-Cola by 5.37%.
Even more interesting is that PEP’s total return has also been better. Remember that KO has a higher dividend yield than PEP — 2.94% (KO) vs. 2.81% (PEP). If you add in the actual dividends declared over the past year, KO has paid out $1.59 per share in dividends. One year ago KO’s price was $46.02, so the dividends paid earned investors 3.46%.
PEP declared $3.765 per share in dividends over the past year. Based on the year-ago price of $113.85, these dividends earned investors 3.31%.
On a total return basis, Coca-Cola stock earned investors 22.46% (19 % price appreciation plus 3.46% in dividends). But PEP earned their investors 23.34% (20.03 % plus 3.31%).
So, even though PEP is cheaper than KO stock and has a lower dividend yield, investors in PepsiCo would have made 3.89% more on their investment than those in Coca-Cola stock, including dividends.
Why Has PEP Outperformed KO Stock?
But both companies also measure their earnings on an “organic” basis, which strips out currency effects and other non-comparable distortions. KO’s organic EPS was up 6% but PEP had 0% growth.
The measure I like to look at is free cash flow (FCF). This is a measure of actual cash flow returns. Based on my analysis, Coca-Cola had an amazing 46.5% increase over the past year. PepsiCo’s FCF grew a respectable 35.7%.
But even that measure is not a perfect comparison. For example, PEP spent a much larger amount of money on capital expenditures, in both dollar volume and as a percent of sales, than Coca-Cola — effectively investing for future performance. If the two capex numbers are put on a comparable basis, PepsiCo’s FCF growth would be as good as Coca-Cola’s.
So by some measures, Coca-Cola performed better than PepsiCo, and in others, PepsiCo outperformed. There is no clear winner here.
Maybe the difference between the two companies is how they see the future.
Future Guidance for the Companies Is Very Similar
KO indicated that its EPS is likely to be -1% to +1% higher in 2019 over 2018. PepsiCo has guided to a 1% lower EPS number for 2019.
These are not big differences.
In fact, the only real difference I can see between the companies is that that PEP’s stock is significantly cheaper than KO’s stock valuation. I pointed this out at the beginning of this article.
PEP’s stock is cheaper and outperformed KO stock. There is not much difference in their financial performance.
I suspect PEP is therefore likely to perform better than KO stock on a total return basis over the next year.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks and was launched on August 30. Subscribers during September receive a 20% discount, plus a two-week free trial.
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