Should You Forget Coca-Cola? Why These Unstoppable Stocks Are Better Buys.
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There's nothing wrong with Coca-Cola (NYSE: KO) as a company. In fact, it has a storied past and likely a bright future. But Wall Street is well aware of how attractive an investment Coca-Cola is, leaving it as what appears to be a fully priced stock today (and most of the time).
It does only one thing: make beverages (although it does this very well). So if you are looking at Coca-Cola, you might want to consider direct competitor PepsiCo (NASDAQ: PEP) or shift gears and look at Procter & Gamble (NYSE: PG). Here's why.
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Coca-Cola is a one-trick pony
Coke's biggest strength is that it is a dominant beverage maker. It benefits from the distribution prowess, marketing skill, and innovation capabilities that come along with its size.
But this strength is also a weakness, since Coca-Cola's business is anything but diversified. Sure, you could argue that it makes different kinds of beverages, but beverages are the name of the game just the same.
At the end of the day, beverages are just one tiny niche of the broader consumer staples sector. Which is why you might want to take a look at PepsiCo, one of Coca-Cola's primary competitors in the beverage niche.
PepsiCo adds a dominant position in salty snacks (Frito-Lay) and a substantial packaged food business (Quaker Oats). This diversification can help to smooth financial performance over time. That may limit gains to some degree, but if there's a problem in the beverage business, it won't derail PepsiCo as it might Coca-Cola.
Meanwhile, Coke's price-to-earnings ratio (P/E) is roughly equal to its five-year average. PepsiCo's P/E is a bit more than 5% below its five-year average at this writing. And its 3.3% dividend yield is a touch higher than Coca-Cola's 3.1%. So PepsiCo looks a little cheaper, offers a little more yield, and has a much more diversified business. That should be attractive to more conservative investors.
Procter & Gamble plays a different game
There's another direction that investors can go, and that's to focus on the broader consumer staples sector. If you do that, then dominant companies like Procter & Gamble can be brought into consideration.
P&G makes consumable goods that people use every day and buy regularly. It has leading positions in products like toothpaste, laundry detergent, toilet paper, paper towels, deodorant, and diapers, to name just a few. If you are a fan of diversification, P&G offers you that in grand fashion, noting that it tends to play at the high end of the product categories in which it competes.