There’s nothing wrong with it Coca-cola(NYSE:KO) as a company. In fact, it has a storied past and probably a bright future. But Wall Street is well aware of how attractive an investment in Coca-Cola is, and today (and most of the time) leaves it as a fully priced stock.
It only does one thing: make drinks (although it does this very well). So if you’re looking at Coca-Cola, you might want to consider a direct competitor PepsiCo(NASDAQ: PEP) or shift gears and watch it Procter & Gamble(NYSE:PG). This is why.
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Coca-Cola’s greatest strength is that it is a dominant beverage company. It benefits from the distribution power, marketing skills and innovation capabilities that come with its size.
But this strength is also a weakness, as Coca-Cola’s business is anything but diversified. Sure, you can argue that different types of drinks are made, but drinks are the name of the game.
Ultimately, beverages represent only a small niche in the broader consumer staples sector. That’s why you might want to take a look at PepsiCo, one of Coca-Cola’s main competitors in the beverage niche.
PepsiCo adds a dominant position in salty snacks (Frito-Lay) and a substantial packaged foods business (Quaker Oats). This diversification can help smoother financial performance over time. That may limit profits to some extent, but if there is a problem in the beverage sector, it won’t derail PepsiCo like it would Coca-Cola.
Meanwhile, Coca-Cola’s price-to-earnings ratio (P/E) is about the same as its five-year average. PepsiCo’s price-to-earnings ratio is currently just over 5% below its five-year average. And its dividend yield of 3.3% is slightly higher than Coca-Cola’s 3.1%. So PepsiCo looks a little cheaper, offers a little more return and has a much more diversified business. That should be attractive to more conservative investors.
There is another direction investors can take, and that is to focus on the broader consumer staples sector. Doing so could bring dominant companies like Procter & Gamble into consideration.
P&G makes consumables that people use every day and buy regularly. It has leading positions in products such as toothpaste, laundry detergent, toilet paper, paper towels, deodorant and diapers, to name a few. If you’re a fan of diversification, P&G offers that to you in a big way, noting that it tends to play at the high end of the product categories in which it competes.
Like Coca-Cola and PepsiCo, P&G is a huge company with distribution, marketing and innovation skills that are difficult to copy. And it has a globally diversified portfolio.
To be fair, if we look at its current price-to-earnings ratio compared to its five-year average price-to-earnings ratio, it is trading similarly to Coca-Cola from a valuation perspective. And the return is only about 2.4%. So in that regard, this may not be as attractive an alternative as PepsiCo.
However, Procter & Gamble’s diversification across multiple product categories should not be ignored. It might even be a good pairing with Coca-Cola if you don’t want to buy PepsiCo.
Buying a half position in Coca-Cola and a half position in P&G would actually lead to more diversification than buying just PepsiCo, since P&G’s products cover a broader range of consumer goods categories. And you wouldn’t compromise on quality in any way, considering that P&G is one of the best-managed consumer goods companies in the world.
There’s nothing wrong with Coca-Cola, and long-term investors will probably do just fine if they buy it. But it’s not the only company considering this.
PepsiCo is another beverage giant to consider, and it’s adding snacks and packaged foods, not to mention a slightly more attractive valuation and higher revenue.
Or you could shift gears and look at a more diversified consumer goods giant like P&G, which could also be a good compliment to Coca-Cola as there is little overlap in its businesses.
Don’t just buy Coca-Cola without thinking about the other choices you have today. Some alternatives might ultimately be more attractive.
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Reuben Gregg Brewer holds positions at Procter & Gamble. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Should You Forget Coca-Cola? Why these unstoppable stocks are better buys. was originally published by The Motley Fool
