Coca-cola(NYSE:KO), PepsiCo(NASDAQ: PEP)And Procter & Gamble(NYSE:PG) are three well-known consumer-facing companies. They are also Dividend Kings, meaning they have paid and increased their dividends for at least 50 consecutive years.
All three companies reported profits for the past month. In those reports and earnings calls, they discussed a similar challenge that was impacting their revenue.
Here’s what you need to know about the state of each company, and what makes all three companies excellent dividend stocks to buy and hold now.
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Coca-Cola and PepsiCo have different brands of non-alcoholic drinks. PepsiCo is more diversified than Coca-Cola because it owns Frito-Lay and Quaker Oats and does not focus exclusively on beverages. Meanwhile, P&G owns dozens of brands in beauty, grooming, healthcare, fabrics, home care and other categories.
All three companies operate globally and rely heavily on international sales for their growth. The global footprint is ideal for tapping into emerging markets and achieving diversification. But now weak demand (especially in China) and unfavorable exchange rates are negatively impacting margins.
The biggest challenge for all three companies is a decline in sales volumes. Sometimes volume declines for a company can be a sign that the company lacks pricing power or is losing market share to the competition. But when it’s a widespread problem, as we’re seeing today, it usually means consumer spending is in a cyclical downturn.
For the nine months ended September 27, Coca-Cola reported only a 1% increase in volume per case. In PepsiCo’s third-quarter report, PepsiCo reported a 2% decline in convenience food volumes and a 1% decline in beverage volumes.
In P&G’s recent quarter, which was the first quarter of fiscal 2025, the company reported stable total volume and organic volume growth of 1%. For P&G’s fiscal year ended June 30, the company reported flat overall volumes, including volume declines in two key segments: infant, feminine and family care and healthcare.
Despite weak volumes for Coca-Cola, PepsiCo and P&G, all three companies are still growing their overall sales and profits thanks to efficiencies, cost management and pricing power. But prices can only be increased so much before consumers back down.
PepsiCo in particular is feeling the consequences of pushing price increases too far. As mentioned, the country is experiencing the worst volume declines. To increase demand, the company has decided not to lower prices but instead include more products in the packs on a case-by-case basis, such as adding 20% more product in Tostitos and Ruffles bags and bonus bags in varied packages.
The main conclusion is that Coca-Cola, PepsiCo and P&G face similar problems. However, they still generate enough profits to deliver on their promises to investors, especially through dividend growth.
In fiscal 2025, Procter & Gamble plans to return $10 billion to shareholders through dividends and $6 billion to $7 billion in buybacks. Coke and PepsiCo aren’t buying back nearly as much stock as P&G, but they are developing brands.
For example, Coca-Cola bought Topo Chico in 2017 and has done a great job expanding distribution and introducing new flavors. The earnings call discussed why Topo Chico has helped make sparkling water a standout category even during this challenging period.
Meanwhile, PepsiCo just bought Siete Foods for $1.2 billion, indicating the company is strong enough to invest in growth even as sales volumes decline.
P&G’s return is just 2.4%, compared to 2.9% for Coca-Cola and 3.1% for PepsiCo. Since dividends are only one aspect of P&G’s capital return program, and P&G buys back relatively more shares than Coca-Cola and Pepsi, it makes sense why its returns would be lower, and it would have a lower payout ratio of 66%, compared to 76% for the other two companies.
From a valuation perspective, PepsiCo has the lowest price-to-earnings (P/E) ratio of the three companies, followed by Coca-Cola and then P&G. But all three companies have lower forward price-to-earnings ratios than their five-year average price-to-earnings ratios, suggesting they can grow to their valuations over time.
PEP PE ratio chart
Given their challenges, Coca-Cola, PepsCoi and P&G aren’t crying out for purchases right now. But they are reliable dividend stocks that could be attractive to risk-averse investors looking to preserve their capital or supplement their income in retirement.
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Daniel Foelber 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.
3 Great Dividend King Stocks for Buy-and-Hold Investors was originally published by The Motley Fool
