Coca-Cola vs. PepsiCo: Which Dividend King Deserves a Premium Valuation Right Now?
Key Points
PepsiCo's roughly 4.7% yield and 54-year streak of dividend increases make it a compelling dividend stock.
Coca-Cola raised its full-year adjusted earnings guidance, while PepsiCo lowered its outlook over rising costs.
Analysts expect Coca-Cola to grow earnings at a faster rate than PepsiCo over the long term, supporting a higher valuation.
PepsiCo (NASDAQ: PEP) and Coca-Cola (NYSE: KO) are both Dividend Kings -- a label for companies that have raised their annual dividend for at least 50 consecutive years -- of keen interest to investors. PepsiCo offers a higher dividend yield, but Coca-Cola is delivering stronger growth amid inflation and interest rates that are squeezing consumers' wallets.
Coca-Cola, the maker of Diet Coke and Sprite, among others, has raised its dividend for 64 straight years. PepsiCo, home of Lay's, Cheetos, Gatorade, and more, has a 54-year dividend growth streak.
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Coca-Cola trades at about 26 times trailing earnings, compared to about 16 for PepsiCo. PepsiCo could be worth buying now for its high yield, but the valuation gap is justified considering Coca-Cola's stronger sales growth in a challenging economy.
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PepsiCo lowered fourth-quarter earnings guidance because of rising costs
PepsiCo's forward dividend yield is about 4.7%, as of Oct. 8, compared to 2.4% for Coca-Cola. PepsiCo's dividend has also grown faster over the last five years, growing about 7% a year vs. Coke's 4.5%.
Even with Pepsico reporting sluggish sales growth this year, the payout looks sustainable. PepsiCo raised its dividend by 4% this year and paid out 75% of its trailing-12-month free cash flow. With PepsiCo reporting record free cash flow of over $10 billion over the past year, the dividend should continue to grow.
However, the stock is trading at a lower P/E multiple for a reason. The company lowered guidance for fourth-quarter core constant currency earnings per share, now expected to be up 1%-2% year over year -- down from previous guidance of 4%-6%. This reflects continued cost inflation that is hurting margins.
Coca-Cola is growing faster than PepsiCo in a challenging economy
Coca-Cola stock is up 26% year-to-date as I write this, outperforming PepsiCo's 12% decline. Coke deserves to trade at a higher P/E due to stronger sales volume growth, hitting 3% year over year in Q1 2026 and accelerating to 5% in Q2 -- its fastest growth in 17 years.
After strong Q2 sales, management raised its full-year adjusted earnings growth outlook to 9%-10% year over year.
Coca-Cola's long-term outlook is for organic revenue growth to remain in the 4%-6% range, outpacing the beverage industry. Given Coke's record of consistent volume sales increases over the last 50 years, excluding the pandemic, investors have confidence in that outlook, which supports a higher valuation for the stock.
Wall Street analysts expect Coca-Cola to grow earnings at an annualized rate of 7.4% over the long term, compared to 4.8% for Pepsico. Higher earnings growth and healthy volume growth are why Coca-Cola deserves to trade at a premium over Pepsico. Coca-Cola is the stock I would buy right now.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.