In times of market turmoil, large companies that sell popular consumer goods tend to have greater stability and more attractive defensive characteristics than those that are more cyclical. Philip Morris International (NYSE: PM) and PepsiCo (NASDAQ: PEP) do not sell the same thing, but they all combine an impressive global production and distribution network. To help them build world-renowned brands.
Health problems have plagued the tobacco industry, but this is a relatively new challenge for PepsiCo and other beverage and snack manufacturers. Despite this, both companies are struggling to adapt to new customer needs. Smart investors are studying two stocks to see if there are better options now. Below, we will look at some key indicators of Philip Morris and Pepsi to help you make the best choice.
Valuation and stock performance
Both Philip Morris and PepsiCo have struggled in the past year, but the beverage giant’s losses are even smaller. Pepsi fell by 4% since April 2017, while the tobacco giant fell 14%.
Based on these data, it is reasonable to assume that Philip Morris is now at a more attractive valuation. However, a closer look at recent and projected returns will lead to different conclusions. The forward-looking indicators show that Philip Morris has an advantage and the yield is 25 times higher than Pepsi’s 30+ level. However, recent changes in tax laws have made tracking profits suspicious, and in the future, the forward multiple of Philip Morris and Pepsi is about 17, which makes the valuation of the two stocks very similar to the recent performance.
Consumer-grade stocks often have attractive dividends, and Philip Morris and Pepsi are no exception. However, Philip Morris is currently paying more, yielding more than 4.25%, while PepsiCo’s yield is less than 3%.
Despite the lower yields, beverage and snack experts have some advantages in tobacco production. Based on current projections for profit in 2018, PepsiCo will pay 55% to 60% of its expected revenue as dividends, which is a fairly sustainable interest rate. On the other hand, Philip Morris’ dividend payout is more than 80%. This limits the tobacco giant’s ability to increase dividends in the future. We have already seen the impact of this restriction, because PepsiCo announced plans to pay 15% dividends later this quarter, even though Philip Morris’s last dividend was only 3%. Those who appreciate the future potential will like Pepsi’s dividend prospects better than Philip Morris now.
Growth prospects and risks
Both Philip Morris and PepsiCo face enormous challenges because health advocates question the products produced by the two companies. Philip Morris responded by fully accepting traditional cigarette alternatives, claiming that its long-term expectation was to completely withdraw from the cigarette market and instead use its iQOS to heat products such as the tobacco system. Philip Morris is convinced that scientific analysis will support risk-reducing products that limit the negative impact on health while providing the experience that smokers will appreciate, and that early data from major markets like Japan show that consumers are willing to convert . Competitors are trying to catch up, but iQOS’s lead will be difficult to overcome.
Most investors do not believe that the health effects of sugar-sweetened beverages and snacks are as serious as smoking, but this has not prevented consumer advocates from calling for Pepsi to take measures to alleviate the trend of obesity and related diseases. This requires some Pepsi skills because consumers are not completely sure how far they are willing to go with the health name of the food and beverage category. Pepsi has been an innovator of healthy snacks, and has always been committed to providing beverages that appeal to a wider audience, surpassing its eponymous carbonated coke. Since the snack market share is much stronger than the beverage market share, the Frito-Lay segment may be a major growth opportunity for Pepsi in the future.
Currently, PepsiCo is the better choice between the two large consumer goods companies. With faster dividend growth, clearer growth prospects and similar valuations, the beverage maker has a path, and Philip Morris must work harder in the future.