Consumer goods companies Coca-Cola (KO 0.03%) and Procter & Gamble (PG 0.32%) have been successful over decades. As a testament to their consistency, strong free cash flow generation, and commitment to shareholders, both have earned places as elite Dividend Kings. That means they have increased dividends annually for a minimum of 50 years.
Which one provides better long-term return potential? To determine that, it’s time to delve deeper into each business.
More than soda
People often think of Coca-Cola as a soda company. It does sell five out of the world’s six top-selling soft drink brands, but it also has other successful products such as water, juice, and plant-based beverages. That’s fortunate since people have been moving toward healthier alternatives.
Coca-Cola continues to grow revenue and profits. Non-GAAP (adjusted) revenue, which removes the effects of foreign exchange translations and acquired/divested businesses, increased by 12% in the first quarter. Price/mix accounted for the bulk of those gains, 11 percentage points. However, volume was 1% higher, and Coca-Cola gained market share in the non-alcoholic ready-to-drink segment.
Although the economic cycle likely affects Coca-Cola’s results due to its away-from-home sales (e.g., stadiums and restaurants), the economy continues to grow steadily, with the first-quarter gross domestic product increasing by 2%.
The business generates a prodigious amount of free cash flow (FCF), which subtracts capital expenditures from operating cash flow. Last year’s FCF was $9.5 billion. It used a majority to reward shareholders by paying dividends, which totaled $7.6 billion in 2022. Management expects FCF of $9.5 billion this year.
The board of directors has increased dividends for 61 straight years, which includes raising April’s quarterly payment from $0.44 to $0.46 per share. Coca-Cola’s stock has a 3% dividend yield, double the S&P 500‘s 1.5%.
Procter & Gamble has a stable of well-regarded brands such as Head & Shoulders, Gillette, Crest, Tide, and Pampers. It sells items like shampoo, deodorant, toothpaste, detergent, and diapers that do well no matter what happens with the economy.
Its fiscal third-quarter sales (ended March 31), removing foreign currency translation effects, rose by 7%. But that was primarily due to higher prices, with volume down by 3%. And that was largely true across each category. I would prefer to see increased volumes, which would demonstrate the brands’ enduring and growing popularity.
Procter and Gamble’s FCF for the first nine months of the fiscal year was $9.2 billion, and it paid dividends of $6.7 billion. While that’s a nice cushion, the FCF did fall from $10.5 billion in the year-ago period.
The company has a strong commitment to dividends, increasing them for 67 consecutive years. Most recently, the board of directors raised May’s quarterly dividend payment by 3% to $0.94 per share. Procter & Gamble’s stock has a 2.5% dividend yield.
Coke is it
Both companies continue to increase dividends, and the stocks have above-market yields. But Coca-Cola’s fundamentals, including higher market share, suggest the stock has better potential.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.