Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) are part of the consumer staples sector. This sector includes many of the leading defensive stocks. A feature of the best companies in this sector is that they offer products that consumers will buy no matter what is happening in the broader economy.
And the recent retail sales numbers bear that premise out. Consumers are changing their spending habits with inflation still hovering near 40-year highs. It seems they’re spending the same amount, but prioritizing grocery purchases over other items.
That isn’t good news for apparel companies, and apparently not oil companies either. But it’s positive news for companies like Coca-Cola and Pepsi who have the advantages of shelf space and pricing power. That’s because the consumer is still willing to set aside in their budget for the company’s products.
In this article, we’ll analyze both stocks to explain why both are good options to deal with uncertainty in the market.
Sneaky Solid Growth
Conventional wisdom says that neither Coke nor Pepsi is a growth stock. However, that depends on your definition of growth. Because viewed over any significant period, both KO and PEP stock have delivered positive stock price growth. For example, in the last five years, Coca-Cola stock is up 42.6%. That’s not bad. But PepsiCo stock comes in at 53% over the same span.
However, when you look at just the last 12 months, the two stocks have delivered nearly the same performance. KO stock is up 13% and PEP stock is up 14%.
Pricing Power Remains Strong
Both Coca-Cola and PepsiCo have been affected by higher inflation numbers. However, in the first quarter of 2022, Coke instituted a 10% price increase and Pepsi increased prices by 7%. And in the second quarter, neither company cited an impact on consumer demand.
Both companies are reporting that inflation is affecting their bottom lines. However, in the first two quarters of the year, both Coca-Cola and Pepsi have posted year-over-year beats on earnings. This is also being reflected in the free cash flow (FCF) of both companies.
For the full year, Coke is projecting $10.5 billion in FCF. That will be slightly down from the $11.25 billion it posted in 2021, but it will be the second highest FCF the company has delivered in the last 10 years. PepsiCo has been increasing its FCF by approximately 8.5% over the last three years. And even if that dips to a more modest 3%-3.5% range, it will be more than enough to support growth in PEP stock.
Dividend Stocks Are Always in Fashion
When the market was falling sharply in May and June, money flowed into defensive stocks. Investors were interested in tried-and-true, blue chip stocks. One quality these company’s share is healthy, high-yielding dividends. Dividends not only add to a stock’s total return, but also can help mitigate losses by allowing investors to reinvest their dividends to buy more shares.
And both Coca-Cola and Pepsi deliver on this score. Both stocks belong to the exclusive category of stocks known as Dividend Kings. These companies have increased their divided every year for at least 50 consecutive years. There’s nothing in the financials of either company that suggests investors should expect anything less in years to come.
Is KO or PEP Stock the Better Buy?
So which stock should you buy? Like the taste tests of the 1980s, that answer may simply come down to your preference. There’s a case to made for each. However, as my MarketBeat colleague Thomas Hughes recently wrote, a stronger case can be made for PEP stock. And I agree with Hughes.
However, like Hughes, I’m not telling you that KO stock is a bad buy. It just appears to have less growth potential. And if you’re expecting the economy to remain sluggish, that may work in your favor.
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Before you consider Coca-Cola, you'll want to hear this.
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