For those who have been following my portfolio should have known that I just picked PepsiCo (NYSE: PEP) over Coca-Cola (NYSE: KO) for my investment. Most of my friends whom I asked told me that I should invest in Coca-Cola for the most basic fact, Coca-Cola has better presence than PepsiCo from where I am from, Singapore. Also, not forgetting, Coca-Cola is one of the companies that Berkshire Hathaway, a company owned by Warren Buffet, has shares in.
The choice of investment in either of the beverage giants is for long term dividend investment and both pays comparable but why did I choose PepsiCo over Coca-Cola?
The following analysis is based prices on the time of writing.
Dividend Yield and Growth
One important number that dividend investors always first look at is the dividend yield. Coca-Cola pays their investors a dividend yield of 3.4% as compared to the 3.0% by PepsiCo. Although on first look, any investor will prefer the higher dividend yield that is given by Coca-Cola, on investing for long-term, the dividend growth is another number that must not be forgotten.
PepsiCo’s dividend growth is at 13.0% for the last year and an average of 7.4% over the last five years. On the other hand, Coca-Cola’s dividend growth is only at 8.9% for the last year and an average of 8.3% over the last five years. Although Coca-Cola has got a more stable dividend growth, the much-higher increasing dividend growth of PepsiCo may be the one that will allow PepsiCo’s dividends to overtake Coke’s.
Based on fiscal year 2014 results, PepsiCo’s dividend payout is at 59.3% , compared to Coca-Cola’s 76.3%. Payout ratio is the percentage of the earnings that is being paid to the investors as dividends. The high payout ratio of Coca-Cola is a sign that on bad years, if the company is not able to increase their earnings, then the company can either keep lesser of their earnings and continue to increases their dividends, or to reduce their dividend payout.
Another of the ratio that I used to determine which company to invest in is the Price-Earnings Ratio (P/E Ratio). The ratio is used to value the company by taking the current share price relative to its per share earnings. The lower the P/E ratio, means that the investor will need to invest in lesser amount for a dollar of its earnings.
The Winner Is…
Well, no prize for guessing correct…
With the above reasons, although investment in Coca-Cola by Warren Buffett is a very strong reason why I should invest in Coca-Cola, I decided to invest in PepsiCo instead (not because I do not trust Warren Buffett). This is because I feel that, while following the investing guru will greatly reduce the chances of any errors made, we should not just follow blindly. After all, investments will require one to do their homework.
Furthermore, the reasons why Warren Buffett decides to buy Coca-Cola shares may no longer be valid, though holding on to the shares will continue to yield returns in the years to come.