Coke vs. Pepsi: Which Cola Conglomerate is the Better Investment?
by Justin Dove, Investment U Research
Thursday, July 7, 2011
A study found that 80 percent of people can differentiate a sample of Coca-Cola (NYSE: KO) from a sample of Pepsi (NYSE: PEP). The same study found that if you give people three samples they can only accurately guess which samples are which 33 percent of the time. That’s the same odds as randomly guessing.
Malcolm Gladwell called this the Triangle Problem in his book Blink: The Power of Thinking Without Thinking. The idea is that the two products are much more similar than they are different. Some people even theorize that the label has more to do with people’s preferences than the actual soda.
This same concept can be extrapolated to each company’s respective stock.
Coke vs. Pepsi… Dividends, Dividends, Dividends
Both Pepsi and Coke are favorites of super investor Warren Buffett. That’s because both stocks have had strong growth and both are cash cows when it comes to dividends. As my colleague Carl Delfeld pointed out last week, high dividend-paying stocks are the most stable form of investment these days.
One interesting note not apparent in the above table above is that Coca-Cola has raised its dividend in a slower, more consistent manner. Pepsi, on the other hand, has significantly upped their dividend distribution over the last few years.
- In 2004, Pepsi offered a quarterly dividend of 16 cents when Coke was offering a quarter.
- Coke has increased annual dividends for 49 years running. Pepsi also has a streak of increasing their annual dividend for 39 straight years.
- Coke’s stock price has grown in value by over 50 percent since the beginning of 2009. Pepsi’s stock has grown by about 40 percent in the same time.
In terms of market share, Coke owns the top two spots in the cola industry – Coke and Diet Coke- with Pepsi’s flagship cola coming in at third.
Pepsi does have a slight advantage over Coke in diversification.
- Pepsi has snack food brands such as Frito-Lay and Quaker under its umbrella. They also own the brands that make beverages such as Gatorade, Tropicana and Naked Juices.
- While Coke hasn’t tapped the snack food market, they do have some beverage diversification. Dasani bottled water, PowerAde and Minute Maid juices are all under Coca-Cola’s umbrella
The Cola Wars Are All About Preference
In his book, Blink, Gladwell postulates that Pepsi did so well in the Pepsi Challenge taste tests because of the nature of sip tests. Pepsi is slightly sweeter than Coke, so in small doses, people prefer the sweeter taste. But throughout a whole can of soda, that sweetness can become overbearing.
Similarly, Pepsi may be a sweeter investment in the short-term. But it’s hard to bet against such a tried-and-true consistent winner such as Coca-Cola for the long-term.