Pepsi May Never Catch Coke as the Premier Soda Brand. But Pepsi Stock Already Has.

To get away from the current carnage in the world, I was recently watching an old episode of Comedians in Cars Getting Coffee, Jerry Seinfeld’s Netflix series where he drives around in fancy cars with various high-profile comedians to (you guessed it) get coffee. Jerry told a joke that was not so much funny as it was true: “If you’re Pepsi, what’s it like knowing that no matter what you do, you’ll always be second place? You’re never gonna beat them.”

The “them” to which Jerry was referring was, of course, Coca-Cola (KO). And he’s right. While the two soft drink behemoths control a combined 60% of the global non-alcoholic beverages industry, Coke’s share is roughly double Pepsi’s, 40% to 20%. In terms of perception, I bet the breakdown is about the same; two of out of every three people probably prefer Coke.

But when comparing Coke vs. Pepsi stock, that’s more debatable.

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Coke vs. Pepsi Stock: Tale of the Tape

KO stock has long been a staple of income investors’ long-term portfolios. It’s one of the most reliable dividend stocks you can find, and a premier dividend grower (Dividend Aristocrat, they’re called), having raised its payout annually for the last 56 years. While its share price appreciation has slowed over the years, it’s still up 77% in the last decade – well below the 175% return in the S&P 500, though the dividend growth and high yields (currently 3.5%) help matters.

But Pepsi stock has a similar resume. It’s up 99% in the last decade, yields 3.1%, and has raised its dividend for 46 straight years.

Here’s where the two soda stocks differ: PEP is actually beating the market these days. It’s “only” down -3.8% year to date, versus a -5.4% pullback in the S&P 500, and is up 31% in the last two years, well ahead of the 11.7% return in the S&P 500. KO stock, meanwhile, is down more than 15% year to date and its 8.6% return in the last two years trails the gains in the large-cap index.

In turbulent markets, investors turn to dividend-paying market stalwarts like Coke and Pepsi. But Pepsi has outperformed, for two reasons:

1. The stock is cheaper. Even after outperforming KO stock for the past two years, its forward price-to-earnings ratio (23) is still slightly cheaper than Coke’s (24). On a price-to-sales basis, Pepsi (2.72) is markedly cheaper than Coke (5.47).
2. Better dividend growth. Over the past five years, Pepsi has raised its dividend by an average of 9.8% per year. Coca-Cola has raised its dividend by an average of just 5.6% per year during that time.

As for sales and earnings growth, they’re pretty similar. Both are growing revenues by just single digits these days, as you might expect from two companies that have been in business since the 1800s. Earnings aren’t much better; Pepsi’s are expected to be down 3.8% in 2020; Coke’s are expected to fall more than 11%. Even as both companies expand their product offerings, their global reaches extend so far that there’s not much globe left to conquer; people in Yemen have probably taken the Pepsi Challenge.

If it’s growth you seek, I wouldn’t invest in either stock. However, if you’re investing for the long haul, let me refer you to this statistic Tom Hutchinson, our dividend expert and chief analyst of Cabot Dividend Investor, gave out at our annual Cabot Wealth Summit last August: if you had invested $20,000 in Pepsi stock 10 years ago and had the dividends reinvested, today you would have $63,688 – better than the $62,954 you’d have if you’d bought the S&P 500, despite the fact that it’s underperformed the market for the last decade.

PEP Trending Better

That’s the power of dividend reinvestment. And it’s why you’d be wise to have either KO or PEP in your retirement portfolio. Buy one of them today, stash it away for 10 years … and you may triple your money even with modest annual share price appreciation.

If I had to register a verdict on Coke vs. Pepsi stock, because it has better relative performance of late, PEP might be a better play right now. But you’ll probably do just fine with either.

In that respect at least, Seinfeld’s wrong. Pepsi’s just as good as Coke.

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*This post has been updated from an original version.