Coca-Cola(NYSE: KO) is a very well-run company, highlighted by its status as a Dividend King. But it is also expensive, with its price-to-sales (P/S) and price-to-earnings (P/E) ratios both above their five-year averages and its dividend yield near decade lows.
Yes, it is a reliable and safe dividend stock, but it probably isn't worth chasing an overvalued stock if you are trying to find a safe haven during the current market storm. You'll be far better off looking at dividend stocks that are more attractively priced like Realty Income(NYSE: O), Hershey(NYSE: HSY), and Coca-Cola competitor PepsiCo(NASDAQ: PEP). Here's why.
1. Realty Income is down 20%
Over the past three years, Coca-Cola's stock price is up about 10%, while Realty Income's shares are down roughly 20%. The giant net lease real estate investment trust's (REIT's) 5.8% yield is near the highest levels of the past decade. This high yielder will likely be much more attractive than Coca-Cola for an income-focused investor.
Backing that yield is an investment-grade-rated balance sheet and a three-decade-long history of annual dividend increases. Realty Income also has a geographically diverse portfolio, with buildings in both North America and Europe. And while retail single-tenant properties make up nearly 75% of rents, the rest is spread out across industrial assets and unique properties, like casinos and vineyards.
Realty Income is a rather boring investment, but that's pretty much the point in today's volatile market. Slow and steady dividend growth, at a reasonable price, suddenly has sex appeal!
2. Hershey will be an acquired taste
Hershey is a more difficult sell, given that it is facing material cost headwinds thanks to the shocking ascent in cocoa prices. You can't make chocolate without cocoa, so the company has no choice but to pay up. In 2025, rising cocoa prices are expected to push adjusted earnings down 35% or so from 2024's level. And there's no quick fix given the nature of cocoa production.
That said, Hershey is used to dealing with commodity price volatility. Moreover, high commodity prices normally lead to greater supply, which in trun leads to lower prices in time. In the meantime, Hershey is likely to use the age-old consumer staples playbook of raising prices (as much as it reasonably can) and cutting costs. And Hershey isn't exactly struggling to find a way forward, either. It just inked a deal to buy LesserEvil, a maker of salty snacks.
In fact, despite the rough numbers expected on the bottom line, Hershey is projecting revenue growth of around 2% in 2025. So the company is still growing its business, which will likely be the more important fact if you invest for decades and not days. Meanwhile, the food maker's stock is down 25% and its dividend yield is historically high at 3.3%, suggesting it has been put in the discount bin.
3. If you like Coca-Cola, you'll love PepsiCo
While Coca-Cola is a bit expensive right now, competitor PepsiCo is looking rather cheap. The shares are down a little over 10% over the past three years, the dividend yield is historically high at 3.7%, and, like Coca-Cola, PepsiCo is a Dividend King. Also, the P/S and P/E ratios are both below their five-year averages.
So why is Coca-Cola being afforded a premium price while PepsiCo isn't? PepsiCo's growth has slowed down following an unusually strong period coming out of the coronavirus pandemic, when it was able to push through large inflation-driven price increases. And the snack category, where PepsiCo is the industry leader, is facing some demand headwinds. Coca-Cola only makes beverages, so it doesn't have to deal with that overhang.
But even great companies go through hard times now and again. That's basically what is happening with PepsiCo today. Given its long and successful history, the food and beverage maker will likely break out of the rut sooner or later. Like Hershey, it is using bolt-on acquisitions (Siete, a maker of Mexican American foods, and Poppi, a prebiotic soda) to help refresh its product lineup. That's par for the course for this industry giant and a sign that management is doing what it has to do to get back on track. If you are looking at Coca-Cola, you might want to shift your sights to more attractively valued PepsiCo instead.
Be careful what you pay for
Sleeping well at night is important, and it can be worth a premium for a stock if that helps ease your nerves. However, you shouldn't buy just anything. If you step back and look at the options you have today, a stock like Coca-Cola, while it would be a fine choice for most investors, may not be the best option you have. Realty Income and PepsiCo offer more yield and strong businesses, for example. And while Hershey isn't exactly a yield monster, it does look historically cheap for those that can handle buying stocks that are in the Wall Street doghouse.
Should you invest $1,000 in Coca-Cola right now?
Before you buy stock in Coca-Cola, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Coca-Cola wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004... if you invested $1,000 at the time of our recommendation,you’d have $469,399!* Or when Nvidiamade this list on April 15, 2005... if you invested $1,000 at the time of our recommendation,you’d have $590,231!*
Now, it’s worth notingStock Advisor’s total average return is731% — a market-crushing outperformance compared to146%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
Reuben Gregg Brewer has positions in Hershey, PepsiCo, and Realty Income. The Motley Fool has positions in and recommends Hershey and Realty Income. The Motley Fool has a disclosure policy.
