Top Investment Option at the Moment: Coca-Cola versus Kraft Heinz
In the realm of consumer goods titans, it's hard to overlook the global recognition of Coca-Cola (KO -0.43%) and Kraft Heinz (KHC 0.07%). Both are long-term investments in established, dividend-paying businesses, and they hold a special place in Warren Buffett's Berkshire Hathaway portfolio with a 9.3% and 26.9% stake, respectively. Despite lagging the S&P 500 index in recent years, these two leaders offer investors a measure of portfolio stability with their enduring brand offerings.
Let's delve into their financials
Bear in mind that Coca-Cola dwarfs Kraft Heinz in terms of market capitalization, boasting an impressive $278 billion compared to Kraft Heinz's $39 billion. For its latest quarter, Coca-Cola reported $11.9 billion in revenue, marking a 0.8% decrease from the previous year. Despite a dip in sales in China, CEO James Quincey remains optimistic, citing future opportunities in the China market.
Relevant info: Coca-Cola has consistently increased its dividend for over half a century and is a member of the Dividend Kings club.
Meanwhile, Kraft Heinz demonstrated a 2.8% sales decline in the third quarter of 2024, bringing in $6.4 billion. Management squeaked out a subtle explanation for the sales slip, attributing it to broader consumer behavior changes due to economic uncertainty.
Moving on to their profitability, both companies possess remarkable metrics but faced challenges in the third quarter. Coca-Cola reported near $2.9 billion in net income, dipping 7.6% year over year. However, the company's free cash flow took a hit, clocking in at a detrimental $1.7 billion due to an ongoing tax litigation with the IRS.
Two key takeaways: Kraft Heinz reported a net loss of $290 million, primarily due to a $1.4 billion impairment charge from its struggling Lunchables brand. Adjusting for this and other charges, the brand's payout ratio is more manageable.
Dividends maintain the spotlight
Mature corporations like Coca-Cola and Kraft Heinz predominantly distribute profits through dividends and share repurchases. Coca-Cola currently offers a quarterly dividend of $0.485 per share, generating a 3% dividend yield. As a Dividend King with a streak of 62 years, Coca-Cola consistently raises its dividend.
Further insights: Coca-Cola has a payout ratio of 78%, suggesting the company's ability to sustain and raise its dividend remains robust.
On the other hand, Kraft Heinz is less generous in this regard, offering a 5% dividend yield with a quarterly dividend of $0.40 per share. The company has been handing out dividends since 2013 but has not raised its payout in the last five years.
Related data: Kraft Heinz posted a payout ratio of 142%, but this figure is distorted by a one-time impairment charge. Adjusted for this and other charges, the ratio is trimmed down to a more manageable 52%.
Share repurchases take a backseat
Both companies employ share repurchase programs to boost shareholder value, albeit with varying effectiveness. Over the past three years, Coca-Cola has repurchased just 0.4% of its outstanding shares. Meanwhile, Kraft Heinz managed to reduce its share count by 1.3% through share repurchases.
Which stock reigns supreme?
Valuation plays a pivotal role when it comes to any stock, and a forward price-to-earnings (P/E) ratio is an effective metric for determining valuation. As of now, Coca-Cola trades at a forward P/E ratio of 22.7, while Kraft Heinz goes for a more affordable 10.7 ratio.
Despite both stocks being priced lower than their five-year median forward P/E, neither is poised for substantial near-term growth due to the challenges they are currently facing. Nevertheless, they both have the potential to reward income-seeking investors with their dividend yields.
Preference: Considering both companies' sales performance and Coca-Cola's impressive dividend track record, the latter appears to be the better investment option. If you’re looking for stable income and potential long-term returns, Coca-Cola could be your best bet.
Based on their financial performances, Coca-Cola's robust dividend history and consistent payouts make it an attractive option for income-focused investors. With a 3% dividend yield and a payout ratio of 78%, the company demonstrates a strong capacity to sustain and increase its dividends.
In contrast, Kraft Heinz, while offering a higher dividend yield at 5%, has not raised its payout in the last five years. Despite reducing its share count through share repurchases, the company's current valuation and payout ratio make it less appealing compared to Coca-Cola.
To further enhance your investing strategy, you could consider diversifying your portfolio by investing in both companies due to their different financial characteristics and dividend yields. However, Coca-Cola's impressive dividend track record and overall financial health may make it a more compelling choice for income-focused investors.
