Better Buy: Starbucks Corporation vs. PepsiCo

By Markets Fool.com


Image source: Starbucks.

Continue Reading Below

Giving people what they want to eat and drink is big business, and both Starbucks (NASDAQ: SBUX) and PepsiCo (NYSE: PEP) have made it their business for decades. Starbucks helped bring the coffeehouse culture into the mainstream in the U.S. and has become a global giant in the coffee industry, all the while looking to offer food items to patrons, as well. PepsiCo is known best for its namesake cola, but its Frito-Lay division is also a giant in the snack-food industry.

Investors looking at both companies are curious whether one offers a better value than the other right now. Let's look at how Starbucks and PepsiCo compare on some key metrics to see which one might be a smarter pick for investors.

Valuation and stock performance

In terms of giving investors healthy returns, both Starbucks and PepsiCo have been good picks for shareholders. Over the past year, PepsiCo has had a decided advantage: Its stock produced a 21% return for shareholders since September 2015. Starbucks is also up, but its gains have been limited to just 7%.

Consumer goods stocks have been in the limelight lately as good prospects for a solid economy, so valuations for both Starbucks and PepsiCo have been fairly rich. Starbucks currently trades at almost 32 times its trailing earnings, which isn't inconsistent with its past valuation, but nevertheless represents a premium to the overall market. PepsiCo weighs in with a price-to-earnings ratio of 30, giving it only a minimal advantage over its coffee counterpart.

Continue Reading Below

When you look at forward earnings expectations, however, Pepsi takes a slight lead. Starbucks' forward earnings multiple falls to 26, based on the belief that its profits will rise in the immediate future. But Pepsi stock trades at just over 20 times forward earnings. That makes PepsiCo the better bargain from a valuation standpoint, even though its stock has already risen more than Starbucks recently.

Dividends

One area in which Starbucks fails the Pepsi Challenge more clearly is in considering dividends. PepsiCo features a dividend yield of almost 3%, which is roughly double the 1.4% yield that Starbucks investors receive currently.

To some extent, that disparity is a bit misleading. PepsiCo is a more mature company, and it has made a corporate decision that involves paying out about 80% of its earnings in dividends right now. That's not uncommon, but it's quite a bit greater than the roughly 40% of earnings that Starbucks dedicates to dividends. As we'll see below, Starbucks is more committed to faster growth opportunities, and that limits the amount of capital it wants to use for dividends.

Nevertheless, PepsiCo has an impressive dividend history. The company is a Dividend Aristocrat, with 44 consecutive years of annual dividend increases. Its most recent $0.05 per share increase in July marked a 7% rise. By contrast, Starbucks only started paying a dividend at all in 2010, and although it has boosted that payout significantly over that span, it still can't match the record that PepsiCo has established. For dividend investors, PepsiCo has a clear edge.

Growth prospects and risk

When it comes to growth, Starbucks has been extremely strong for a long time. In its most recent quarter, the coffee giant reported record results in revenue, profits, and customer traffic. Yet even though the company boosted sales by 7% and sent net income up by more than a fifth, some investors remain concerned that the coffee specialist's growth rates could be moderating. Comparable-restaurant sales for company-owned locations were up just 4%.

The opportunity to grow its store network with new locations should continue to sustain overall growth rates at a healthy rate, and Starbucks even has PepsiCo to thank for some of its growth, with a joint venture allowing for distribution of ready-to-drink coffee beverage products in Latin America. Between mobile ordering, successful promotions, and customer loyalty, Starbucks has plenty of potential left in the tank.

PepsiCo faces larger challenges in the beverage portion of its business, which has been under assault on multiple fronts from government entities and health officials arguing that sugary soft drinks are a primary cause of certain chronic illnesses. Yet CEO Indra Nooyi has done a good job of getting out in front of the anti-soft-drink trend, finding a balance between meeting the needs of health-conscious consumers while also appealing to a younger audience that is only now establishing its consumer preferences.

In particular, having the snacks business under the same corporate umbrella gives PepsiCo a big advantage over its beverage-only rivals, and investors have rewarded PepsiCo with greater confidence in its future than its industry peers. PepsiCo's growth isn't likely to be staggering, but it's doing a good job of withstanding downward trends in part of its business.

Starbucks and PepsiCo both serve food and beverages, but they are very different stocks. Both companies have growth prospects, and Pepsi's dividend history makes it more appropriate for income investors. For those seeking maximum potential price appreciation, Starbucks presents a prettier picture despite its somewhat pricier shares.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Dan Caplinger owns shares of Starbucks. The Motley Fool owns shares of and recommends PepsiCo and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.