Better Buy: International Business Machines Corporation vs. Coca-Cola

MarketsMotley Fool

Colors can play a key role in a company's identity, even if it's not always for reasons that you'd expect. International Business Machines (NYSE: IBM) is also known as Big Blue, with some theories suggesting that the color of the tech giant's mainframe computers in the 1960s led to the moniker. Coca-Cola (NYSE: KO) isn't the company behind Big Red soda, but its red cans have gained worldwide recognition.

As investments, IBM and Coca-Cola are in completely different industries. But both have had to make aggressive moves to shift strategy in an aim toward perpetuating their respective businesses. Below, we'll take a closer look at IBM and Coca-Cola, using some basic metrics to compare them in an effort to determine which one is the smarter stock pick right now.

Continue Reading Below

Stock performance and valuation

Neither IBM nor Coca-Cola has seen its stock move much in the past year, but Coca-Cola has at least eked out a slight gain. The soft-drink giant is up 1% since March 2018, compared to a 13% loss for IBM over the same period.

It's tough to compare valuations between these stocks looking at their recent earnings histories right now. One-time impacts from tax reform have affected every major U.S. corporation's bottom line, and both companies have also made some internal corporate moves that have led in some cases to further extraordinary items on their income statements. However, when you pull in near-term projections for future earnings, IBM takes a clear valuation lead. Big Blue currently trades at less than 11 times forward earnings estimates, compared to a forward multiple of more than 18 for Coca-Cola. That creates a margin of safety for IBM that will be useful in evaluating its growth prospects in comparison to Coca-Cola's.

Dividends

Both IBM and Coca-Cola have been excellent dividend stocks. Right now, the tech company has a lead over the beverage giant, with IBM's yield of almost 4% solidly ahead of the 3.6% yield for Coca-Cola.

Where Coca-Cola has an edge is in its long-term dividend growth. Coca-Cola just implemented its 56th consecutive annual dividend increase, with a 5% boost to bring its quarterly payout to $0.39 per share. IBM's history is still impressive, with 22 years of consecutive dividend increases including last year's 7% boost during the spring. In terms of sustainability, their payout ratios are once again skewed due to one-time factors, but IBM currently has more earnings strength, and that translates to lower projected payout ratios going forward. Overall, IBM looks to have an edge in dividends as well.

Growth prospects and risks

Both IBM and Coca-Cola have made progress lately despite having to overcome obstacles. IBM's business has gone through a big change recently, with the tech giant finally reporting year-over-year revenue growth in its most recent quarterly results for the first time in more than five years. After having successfully seen early on that it wouldn't be able to continue to rely solely on hardware for its success, IBM's pivot toward software and services proved prescient, but Big Blue failed to move as aggressively into cloud computing, data analytics, and other cutting-edge tech movements as necessary to keep up with competition. IBM has identified areas like blockchain and quantum computing as potential growth prospects, and if it can become a leader in those growing niches, then Big Blue will stand to gain from their adoption in the future.

Coca-Cola is also moving forward, with the shift away from in-house bottling operations having culminated in the refranchising of bottlers off Coca-Cola's consolidated financial statements. Revenue will fall from that move, but the beverage giant hopes that higher profit margins will preserve and foster further earnings growth in the near future. In response to criticism about its sugary carbonated beverages, Coca-Cola has made shifts toward smaller serving sizes that could actually boost profit margin over the long run. New beverage options will also play a role in pivoting the company toward healthier fare, and as long as the company can stay ahead of regulators and consumer groups looking to clamp down on its practices, Coca-Cola stands to keep gaining momentum.

All told, IBM looks like the better buy. Even as both companies aim to complete turnarounds, IBM's lower valuation and higher dividend give it advantages that Coca-Cola can't match right now.

10 stocks we like better than IBMWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and IBM wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of March 5, 2018

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.