Quick, think about soda companies. What brand comes to mind? Probably Coca-Cola (KO 0.81%). That makes sense, given that Coca-Cola is one of the largest and best-known consumer staples brands in the world. But is it the smartest growth stock to buy if you have $1,000 to invest right now? Don’t hit the buy button until you read about this high-yield alternative.
What does Coca-Cola do?
From a big-picture perspective, Coca-Cola makes food, even though its products get their own category with the consumer staples space. Beverages are still a life necessity, even if its eponymous product is more for pleasure than need. The company is an industry powerhouse.
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Not only is Coke one of the best known, and most beloved, beverage brands, but Coca-Cola happens to have a massive distribution network, impressive marketing skills, and powerful research and development chops. The company’s scale, meanwhile, gives it the wherewithal to act as an industry consolidator, buying up smaller brands and beverage concepts to round out its product portfolio. That, in turn, helps to keep Coca-Cola’s brands relevant with consumers.
The company’s business is so strong that it has been a longtime holding of Warren Buffett within Berkshire Hathaway‘s stock portfolio. If Buffett has put billions into Coca-Cola, why shouldn’t you put in $1,000?
There’s one notable reason: Investors have fully priced Coca-Cola’s shares. The stock’s price-to-sales ratio and its price-to-earnings ratio are both above their five-year averages, and the dividend yield is near 10-year lows. The business is doing relatively well right now, but virtually everyone seems to know it.
There’s another option in the beverage space
One of the other factors that sets Coca-Cola apart is its status as a Dividend King. But it isn’t the only Dividend King beverage company. Direct competitor PepsiCo (PEP 1.40%) has increased its dividend annually for 53 years and counting. Meanwhile, PepsiCo’s price-to-sales and price-to-earnings ratios are below their five-year averages, and its yield is toward the high end of its historical range. So, unlike Coca-Cola, PepsiCo looks cheap.
PepsiCo stands out on the valuation front, but it also stands out on the diversification front. Like Coca-Cola, it has a globally diversified business. But PepsiCo operates in the salty snack and packaged foods spaces, too. That gives it more levers to pull to support long-term growth and more businesses to lean on when one of its divisions is facing difficulty. And make no mistake, every company, no matter how good, eventually faces hard times. The best companies, which include Dividend Kings, are the ones that successfully manage through the hard times.
While Coca-Cola is performing quite well today, PepsiCo isn’t. That’s why its yield is a historically high 4.3% and its stock price has lost a third of its value since early 2023. But PepsiCo isn’t giving up. In fact, it is leaning on its successful playbook and buying smaller brands (Siete and Poppi) that are more relevant with consumers right now. That should, in time, help PepsiCo to get back on the growth track.
PepsiCo could be the contrarian play you’ve been looking for
If you’re looking at Coca-Cola today, you should probably give PepsiCo a closer look. But don’t just think about how each business is performing this very second. Think about their valuations in relation to their performance and, just as important, what each company is doing to ensure they succeed. They both have solid businesses and are working on a bright future, but PepsiCo isn’t getting any credit for it because it is facing some near-term headwinds.
If you can think long term, putting $1,000 into PepsiCo today could end up being a huge win for your future wealth. Note that one of the keys to Buffett’s investment approach is buying good companies when they look attractively priced. Between Coca-Cola and PepsiCo, it is PepsiCo that passes that simple screen.
