Question

Dividend and payout policy.

Analyze (Coca Cola)KO and (Pepsico)PEP earning versus dividend payout (or share repurchase) policy using historical data.

Should firms change or follow payout policy in the next five years?

Answer 1

The Coca-Cola Corporation (NYSE: KO) and PepsiCo, Inc. (NYSE: PEP) offer different benefits depending on investor tastes and goals. Coca-Cola presents a slightly lower risk proposition with a higher dividend yield. PepsiCo has superior growth prospects, better efficiency ratios, more modest implied growth, generally superior relative valuation and more diversification of product offerings. Analysts are generally positive on both companies, and neither is remarkably different from the other in any major financial analysis metric. Overall, PepsiCo has a stronger bull thesis. However, the most attractive element of either thesis is the dividend yield, and Coca-Cola’s dividend yield is materially higher than PepsiCo’s.

Profitability and Growth

Coca-Cola and PepsiCo are both mature companies with modestly positive outlooks, but PepsiCo has a stronger growth profile. Over the 12 months ending June 2015, Coca-Cola’s total revenue declined 1.8%. Net income over the same period declined 17%. PepsiCo’s revenue grew 4% over the 12 months ending June 2015, while net income grew 8.6%. Coca-Cola has delivered 7.7% compounding annual growth over the past 10 years, which is outpaced by PepsiCo’s 8.6%. Analysts expect Coca-Cola’s earnings to grow 5.8% in 2016, with 4.22% compounding annual growth over the next five years. Consensus analyst estimates call for 8.6% earnings per share (EPS) growth from PepsiCo, followed by 5.9% compounding growth over the next five years. Neither company can be considered high-growth, but PepsiCo has a clear edge in historical and expected growth for both the top line and profits.