Coca Cola and PepsiCo: A win-win situation

Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The similarities between Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) go well beyond their identical-tasting colas. From their pricing strategies to their scramble for market shares, these two continue to fight an intriguing battle over decades and decades. In the wake of recent earnings releases by both Coca Cola and PepsiCo, let us take a closer look at what these two giants have in store for investors.

Both companies have similar price-to-earnings ratios of just over 19, and both have their stock valued at approximately 16 times their forward earnings (Coca Cola just above 16, and PepsiCo just below). And what’s more, both companies offer solid prospects for long-term investors.

A big swig of Coca-Cola

For the fourth quarter, Coca Cola reported net income of $1.87 billion, or $0.41 per share, up from $1.66 billion, or $0.36 per share last year. Revenue increased by 4% to $11.46 billion.

Analysts were expecting earnings of around $0.44 per share on revenue of $11.53 billion. Global volumes were up 3% vis-à-vis analyst expectations of around 3.9%. So the results were a mixed bag as far as analyst expectations were concerned, but in line with the company’s growth targets. There was some weakness noted in the stock price following the earnings release, but this should not concern the long-term investors.

There were in fact a few very strong pointers that we noted, most importantly the solid results in emerging markets like Thailand, India, and Russia. Coca-Cola achieved volume growth of 22%, 16%, and 8%, respectively, for the full year. China grew 4% affected by bad weather, slowing economy, and a later Chinese new year.

The company will continue to focus on these markets, where consumption of Coca Cola brands is less than 150 eight-ounce servings annually. In the US, the consumption is around 403 such servings per year. Coke is also trying to augment its business of non-carbonated drinks, and it stands to gain significantly from its unparalleled distribution network. 

A taste-test for PepsiCo

Meanwhile, PepsiCo reported solid fourth-quarter results, beating analyst estimates. The company earned $1.66 billion, or $1.06 per share, against $1.42 billion or $0.89 per share a year ago. Revenue was $19.95 billion, down 1% from last year. However, organic revenue was up 5%, driven by 9% growth in developing and emerging markets. The analysts were expecting earnings of $1.05 per share on revenue of $19.7 billion. The company's earnings beat led to a rise in Pepsi's share price.

PepsiCo has several positive points, which offer solid prospects for investors. It has a well-diversified product portfolio with well-balanced exposure in both beverages and snacks segments. It is witnessing solid growth momentum in its foods business, which witnessed 8% organic revenue growth in the fourth quarter.

The company is investing significantly on its brand-building initiatives.  In 2012, it spent 5.7% of its net revenue in marketing, up from 5.2% in prior year. It is also moving ahead with a major restructuring program that commenced last year.

How do investors gain?

In addition to the solid upsides that both the stocks offer to long-term investors, these two companies are quite well known for returning value to shareholders in the form of healthy dividends and regular share buybacks.

In 2012, Coca Cola paid dividends of $4.6 billion and repurchased shares for $4.5 billion thus returning $9.1 billion to shareholders. PepsiCo was not lagging behind much, either. In 2012, through a combination of dividends and share repurchases, it returned $6.5 billion to shareholders.

Both Coca Cola and PepsiCo have announced dividend increases following their earnings releases. For Coca Cola, this is the 51st consecutive year of dividend increases.

The company has upped its quarterly dividend by 10%, from $0.255 to $0.28 per common share. This translates to an annual dividend of $1.12 per share, compared to $1.02 per share in 2012. At the current share price of $38.11 the new dividend will yield 3% annually.

PepsiCo has announced a 5.6% increase, which works out to an annual dividend of $2.27 per share, compared to $2.15 in 2012. At the current share price of $75.62, this also yields 3% annually. This is PepsiCo’s 41st consecutive year of dividend increases.

Both companies are a permanent feature in the S&P 500’s Dividend Aristocrats Index, which tracks the top S&P 500 blue-chip companies that have increased their dividends for 25 or more consecutive years.

To sum up

Coca Cola and PepsiCo are both solid investment propositions. Both companies have significant upside potential stemming from their operational strength and growing presence in emerging and developing economies. This is not yet factored in their current stock prices. In addition Coca Cola and PepsiCo continue to remain investor friendly with their attractive dividend yields and share buybacks.


tinade has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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