When it comes to consumer goods, few companies can rival the global recognition of Coca-Cola(NYSE: KO) and Kraft Heinz(NASDAQ: KHC). Both stocks offer an investment in mature, dividend-paying businesses and are also longtime holdings of Warren Buffett's Berkshire Hathaway, which owns a 9.3% and 26.9% stake, respectively.
Notably, Coca-Cola and Kraft Heinz have lagged the market benchmark S&P 500 index in recent years but have offered investors stability in their portfolios as their brand offerings continue to endure. So, let's check in with these two market leaders to see which stock stands out as the best to buy today.
Are You Missing The Morning Scoop? Wake up with Breakfast news in your inbox every market day. Sign Up For Free »
Let's compare their recent financials
Before examining each company's revenue and net income, it's worth noting that Coca-Cola is a much larger company than Kraft Heinz, with a market capitalization of $278 billion compared to Kraft Heinz's $39 billion.
For Coca-Cola's most recently reported quarter, the company generated $11.9 billion in revenue, representing a 0.8% decrease from the same period a year ago. CEO James Quincey pointed to weakness in China for the sales decline but remains optimistic about the future, stating on the company's most recent earnings call, "We see light at the end of the tunnel and long-term investment opportunities for the China business."
Similarly, in Q3 2024, Kraft Heinz experienced a year-over-year sales decline of 2.8%, equating to $6.4 billion. In its earnings release, management blamed the sales slump, particularly among its Lunchables brand, on "continued shifts in consumer behavior due to economic uncertainty."
As for the bottom line, both companies are profitable by certain metrics but faced complications in the third quarter. First, Coca-Cola generated nearly $2.9 billion in net income for the quarter, a decline of 7.6% year over year. However, looking at the company's free cash flow, it lost $1.7 billion. That's because the company is in ongoing tax litigation with the IRS that dates back to 2007, and Coke deposited $6 billion in escrow during the quarter as its dispute continues.
Comparatively, Kraft Heinz reported a net loss of $290 million vs. a positive $262 million a year earlier, mainly due to a $1.4 billion impairment charge led by its aforementioned struggling Lunchables brand. However, looking at free cash flow, which doesn't include the impairment charge, the company generated $849 million for the quarter, representing a 24.3% year-over-year decline.
Both stocks prioritize dividends
Mature companies like Coca-Cola and Kraft Heinz generally seek to distribute profits through dividends and share repurchases. Coca-Cola currently offers a quarterly dividend of $0.485 per share, translating to a 3% dividend yield. As a member of the elite Dividend Kings club, the company has consistently increased its dividend for over 50 years, maintaining a streak of 62 years.
When evaluating dividend stocks, it is crucial to consider the payout ratio, which shows the portion of earnings distributed as dividends. A payout ratio exceeding 80% for an extended time could signal potential issues with sustaining or raising dividends. While Coca-Cola's payout ratio stands at a relatively high 78%, it has remained below 75% in recent years, indicating its future dividend is likely secure.
Comparatively, Kraft Heinz offers a higher dividend yield of 5%, with a quarterly payout of $0.40 per share. The company has consistently paid dividends since 2013 but has not raised its payout in the past five years.
At first glance, Kraft Heinz's payout ratio of 142% raises concerns. However, this figure is distorted by a $2.3 billion write-off in 2024 related to goodwill and intangible assets, particularly its struggling Lunchables brand. Adjusting for this one-time impairment, Kraft Heinz's payout ratio, based on management's projected 2024 earnings per share of $3.01 to $3.07, is a more manageable 52% to 53%.
Share repurchase programs, which enhance shareholder value by increasing the ownership stake of remaining investors, are utilized by both management teams but take a back seat to dividends. Over the past three years, Coca-Cola has repurchased just 0.4% of its outstanding shares, while Kraft Heinz has reduced its share count by 1.3%.
Before buying any stock, it's important to examine its valuation. One metric to use is the forward price-to-earnings (P/E) ratio, which measures a company's stock price against expected earnings over the next 12 months and can help determine its valuation by comparing it to its historical averages.
As of this writing, Coca-Cola trades at a forward P/E of 22.7, while Kraft Heinz trades at a lower forward P/E of 10.7. Both stocks are trading below their five-year median forward P/E, suggesting a fair or cheap valuation.
Overall, both companies are incredibly similar despite their market cap valuation disparity in facing sales pressures from changing consumer habits. Given those challenges, as well as others outlined here, neither stock is likely to outperform the overall market in the near term. However, the stocks can still reward income-seeking investors with higher-than-average dividends.
If you choose between the two stocks, Coca-Cola appears to be the better buy due to its sales holding up better than Kraft Heinz's and its track record of increasing its dividend annually.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Nvidia:if you invested $1,000 when we doubled down in 2009,you’d have $358,460!*
Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,946!*
Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $478,249!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Collin Brantmeyer has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
