Better Buy: Procter & Gamble Co. (PG) vs. Pepsi (PEP)

They've each crafted massive consumer-facing businesses that, over the decades, have delivered awesome returns for long-term shareholders. However, both Procter & Gamble and Pepsi are struggling with market share losses today that have caused Wall Street to turn more pessimistic about their growth outlooks.

The good news is that this sour mood has pushed dividend yields to nearly 4% for these blue chip stocks. But which one might make the better investment today? Let's take a closer look.

P&G vs. Pepsi

Company Market Cap Sales Growth Operating Profit Margin Dividend Yield
Procter & Gamble (NYSE: PG) $183 billion 2% 15.7% 3.9%
PepsiCo (NASDAQ: PEP) $137 billion 2% 16.5% 3.8%

Unattractive operating trends

Neither company has enjoyed impressive operating trends lately. For Procter & Gamble, sales are stuck at a 2% growth pace thanks to weakness in the broader consumer staples industry and stubborn market share losses to price-based competition.

Despite having transformed its portfolio to focus on its most promising franchises like Tide detergent and Pampers diapers, P&G continues to grapple with disappointing growth. "We have large businesses in several difficult markets," CEO David Taylor told investors back in April as the company posted a sales expansion slowdown.

Pepsi executives aren't satisfied with their competitive positioning, either. While much of its global snack and beverage business is performing well, the company has been losing share to rival Coca-Cola in the core U.S. market for years now. In fact, the broader business would have grown at a robust 5% rate in the most recent quarter without the inclusion of U.S. beverage segment, which held that result down to just 2%.

Pepsi's rebound plan involves ramping up marketing spending to match the increased investments from Coke. The company also believes it is making good progress at tilting its portfolio away from low-growth niches like sugary drinks and traditional colas. P&G, meanwhile, has many efforts underway aimed at improving operating results, including transforming its supply chain and reorganizing its marketing approach. Management's core challenge is to tie all of these initiatives together and produce a sustained business uptick.

Solid cash returns

Thanks to their dominant market positions and aggressive cost-cutting strategies, both companies promise to deliver significant cash returns to shareholders. However, Pepsi comes out ahead on this metric. Its dividend recently increased 15%, compared to P&G's 3% uptick, and management is expecting to ramp up stock repurchase spending over the next few quarters, while P&G is taking a step back from its aggressive buyback pace.

Both stocks pay a far more generous dividend yield than the S&P 500, and neither payout is in any danger of being cut or suspended.

Which is the right choice for you?

Pepsi is valued at 17 times the $5.70 per share of earnings it is expected to generate this year. For P&G, that valuation sits at a pricier 19 times expected profits.

That discount is just one reason why I believe Pepsi is the better buy today. The more important factor is its relatively clear rebound strategy. Yes, it faces stubborn growth challenges that are made worse by weak industry trends. However, its snack and international segments are doing well, and so it is easier to see how Pepsi can begin marching back toward 5% sales gains next year. P&G, on the other hand, hasn't yet found a strategic approach that shows it can return to its prior pace of modest market share gains in its key franchises.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.