Paying a dividend, and raising it over time, is a commitment to paying out capital to shareholders through the economic cycle. Therefore, it is usually much easier to raise the dividend during periods of economic expansion than during a recession.

Coca-Cola vs Pepsi: Dividend Aristocrat Matchup

Companies in the consumer staples sector are often in the envious position of increasing their dividends as these names sell items that consumers seek out throughout all phases of the economic cycle. 

This advantage can provide steady revenue and earnings growth rates, enabling the companies to raise their dividends for long periods. 

This article will look at two of our favorite names in the space: the Coca-Cola Company (KO) vs Pepsi, Inc. (PEP)

Coca-Cola vs Pepsi

Coca-Cola

With a presence in more than 200 countries worldwide, Coca-Cola has the size, scale, and reach that few companies have. The company’s product portfolio consists of more than 400 non-alcoholic brands, which are consumed an average of 2 billion times per day. Coca-Cola has annual sales of almost $33 billion and a market capitalization of $234 billion.

While Coca-Cola’s product portfolio is immense, the company’s top brands provide the bulk of revenues. The company has 20 different brands that bring in at least $1 billion of annual revenue. Coca-Cola is widely known for its carbonated beverages, as Coke is the top-selling non-alcoholic beverage globally. Other names, such as Diet Coke, Fanta, and Sprite, are also very popular.

As it has been said many times, consumers’ tastes change as they become more conscious about the food and drink they consume. This fact is especially true of developed markets. For example, the U.S. has experienced a decline in soda consumption for several years. To offset this, Coca-Cola has launched several healthier versions of their soda mainstays, such as Coca-Cola Zero, to attract these types of consumers.

But Coca-Cola is more than just a soda company. Its juice business, including Minute Maid and Simply, also tops the $1 billion revenue mark. Interestingly, Coca-Cola launched Minute Maid Pulpy in China in 2005, and the product line reached a billion-dollar status in just five years. This shows the appeal of the products as well as the benefits of a country-specific product. Coca-Cola also has water and sports drinks that resonate with consumers as well. 

Given the top-heaviness of the company’s portfolio, Coca-Cola has embarked upon a brand optimization endeavor. The company expects to eliminate half of the names in its current portfolio as it right sizes its product lines. While this effort appears grand, doing so will only reduce annual volumes by ~2% and revenues by ~1%. Clearly, Coca-Cola is carrying brands that aren’t all that important to its business.

Coca-Cola also took action to divest its bottling operations over the years. While this impacted the top-line figure, the company did so to improve its profit margin. 

Coca-Cola does face some challenges, such as lower soda consumption, but the company does have several significant tailwinds. The popularity of its products and its global reach are very impressive and almost impossible to replicate. The company will trim its product portfolio to focus on its top brands and has many product lines that bring in more than $1 billion in annual revenues. These are just some of the reasons why we feel that Coca-Cola’s dividend growth streak of 59 years is likely to continue. Income investors will also be attracted to the stock’s 3.1% dividend yield, which is more than twice that of the average dividend yield of the S&P 500 index, and Coca-Cola’s dividend safety. 

PepsiCo

PepsiCo’s size and scale are every bit as impressive as its top rival. The company is valued at $216 billion and has annual revenues greater than $70 billion. 

PepsiCo also possesses a portfolio of brands as the company has 23 products that bring in more than $1 billion of sales every year. However, the company is probably best known for its carbonated beverages, including Pepsi, Diet Pepsi, Mountain Dew, and Sierra Mist. Each of these brands enjoys widespread popularity and loyalty amongst consumers.

Many might not know that PepsiCo generates more than half of its sales from food and snack. Top selling products in these categories include Lay’s, Doritos, Cheetos, and Tostitos. 

Like Coca-Cola, PepsiCo is also challenged by changing consumer tastes. However, the company has been very proactive in addressing such needs. For example, approximately half of the annual sales come from the company’s line of “Better For you” products, which are those that have less than 70 calories from added sugar.

PepsiCo has also made an effort to diversify away from just carbonated beverages. The company’s top-selling sports drink, Gatorade, continues to take market share. Its line of teas and coffees, including Lipton and Starbucks ready-to-drink beverages, is also among the best selling in their respective categories. 

PepsiCo also weathered the COVID-19 pandemic reasonably well last year. Part of this was due to robust gains seen in the stay-at-home and eat-at-home transition that took place due to social distancing restrictions. Quaker Foods, in particular, saw sharp increases in demand as consumers were forced to spend more time and eat more meals at home. Quaker Foods also houses more of the healthier options in the portfolio is the only non-chip billion-dollar food and snack brand that PepsiCo has.

The company’s emerging market business will be one of PepsiCo’s top drivers of growth going forward. While the North American business has generally seen low to mid-single-digit growth, the emerging markets expect higher growth rates, including a year-over-year sales increase of 20% in the Africa/Middle East/South Asia and 19% in Latin America in the most recent quarter. In addition, Asia Pacific/Australia/New Zealand/China was up 15%.  

In an effort to boost its profit margins, PepsiCo announced that it was selling its Tropicana, Naked, and other juice brands to PAI Partners. The deal will net the company $3.3 billion in cash while also giving PepsiCo a 39% ownership stake in the new joint venture. The deal is likely to close early next year.

PepsiCo has an excellent dividend growth track record of its own, as shareholders have received a higher dividend for 49 consecutive years. The stock offers a yield of 2.8% today. 

As with Coca-Cola, PepsiCo has several key advantages, namely an impressive lineup of $1 billion+ brands and some of the same challenges, including a more health-conscious consumer. PepsiCo differs because it has a much more diversified business, given the strength of its food and snack portfolio. This gives the company a greater potential customer pool and protects if one business experiences roadblocks. Investors looking for a more diverse consumer staple name should consider buying PepsiCo.