High-quality dividend growth stocks are some of the best long-term investments you’ll find. After all, the only way a dividend grows like clockwork for decades on end is if profit is growing like clockwork for decades on end.

As you might imagine, only the best businesses in the world can manage to do that. But even great businesses can be less great than other great businesses. There are degrees of greatness.

Today, I want to compare two of the best dividend growth stocks out there – Coca-Cola  and Pepsi.

I’m putting two heavyweight food and beverage titans up against one another in a battle royale. Let’s see who comes out on top.

Ready? Let’s dig in.

Coca-Cola Co. (KO) – is a global beverage business with a market cap of $233 billion. PepsiCo, Inc. (PEP) – is a multinational food, snack, and beverage company with a market cap of $199 billion. They’re both giants in the consumer staples space. And I’m going to pit them against each other in three head-to-head rounds.

The first round will be fundamentals. The second round will be qualitative aspects like competitive advantages and risks. The third and final round will be valuation.

Whoever wins the most rounds wins the battle. Regarding fundamentals, we’re going to take a look at dividend metrics, business growth, profitability, and balance sheet strength.

Who’s got the best fundamentals? Coke or Pepsi? Let’s find out.

Coke vs. Pepsi: Dividend Metrics

First, dividend metrics. Coke has Pepsi beat in terms of its dividend growth streak – 59 consecutive years to 48 consecutive years. Coke also has the higher yield, but barely – 3.1% to 3%. Pepsi’s 10-year dividend growth rate of 7.8% easily beats Coke’s 6.4%. And Pepsi has the much lower payout ratio – at about 80% compared to Coke’s dangerous 100%.

So far, based on dividend metrics, I’m giving the edge to Pepsi.

Moving on to business growth, Pepsi starts to extend its lead.

Revenue for Pepsi is up modestly over the last decade, while Coke’s revenue is actually down sharply.

Now, there has been a lot of reshuffling going on over at Coke with bottlers, so it’s not totally apples-to-apples. But there’s still a difference there. It’s the same story with EPS. Pepsi’s EPS has a CAGR of 2.7% over the last decade, whereas Coke’s EPS is basically flat over the last decade.

Pepsi’s starting to really crush Coke now.

Might profitability turn the tide? Over the last five years, Coke has averaged annual net margin of 17.26% and annual return on equity of 30.84% compared to Pepsi’s 11.56% and 59.96%, respectively. I like those higher margins over at Coke. But Pepsi’s slightly better balance sheet saves the day. Their long-term debt/equity ratio of 3.0 is unfavorable compared to Coke’s 2.1; however, both companies have almost the same amount of long-term debt on similar market caps, which means Pepsi’s higher ratio is more a function of lower common equity. Meanwhile, Pepsi has the higher interest coverage ratio, at about 9 compared to less than 8 than Coke. And that’s more important.

Pepsi wins the first round. Their fundamentals are just plain better almost across the board. Let’s start round two.

Coke vs. Pepsi: Qualitative Aspects

Regarding qualitative aspects, I see this as almost a tie. They’re very similar business models with very similar competitive advantages and risks. Coke has the bigger, better, and more recognized beverage business. Pepsi has the snack business, which diversifies the company and gives them broader reach and appeal. Pepsi does have more billion-dollar brands, at 23 versus 20 for Coke. And I’d also say that Coke has slightly more risk, overall, due to their debt position and dividend payout ratio.

I’m giving the second round to Pepsi. But how about valuation? Can Coke at least finish strong? Or will it be a clean sweep?

Coke vs. Pepsi: Valuation

With Pepsi’s superior business, you’d think it would have a higher valuation. But that surprisingly doesn’t seem to be the case. Almost every single basic valuation metric favors Pepsi’s stock.

Investors are paying a richer valuation for an inferior business? That doesn’t make a lot sense to me.

Yet that’s what we seem to have. The P/E ratio for Pepsi’s stock is under 27, whereas Coke’s P/E ratio is over 32. GAAP earnings for these two companies can be lumpy, so we can go to cash flow for some truth. However, again, Pepsi wins. Their P/CF ratio of 18.8 blows away Coke’s P/CF ratio of 21.4. There’s also the sales multiple. Pepsi’s P/S ratio of 2.8 is way lower than Coke’s 7.0.

And KO, unfortunately, has been KO’d. It’s a knock-out win. Pepsi wins all three rounds and finished very strong.

I’d argue that Pepsi is the higher-quality business with a broader array of products. They have more billion-dollar brands, including the likes of Pepsi and Doritos. The dividend is better protected. Their balance sheet is better. And the stock has a lower valuation. If you’re looking to invest in either the beverage or the snack space, Pepsi strikes me as a better long-term investment idea than Coca-Cola for dividend growth investors.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Hyperdrive Event Could Push These 5 Stocks [sponsor]
We are entering Phase 2 of a $353 billion economic event that could change American business. The next 18 months could be amazing for these 5 stocks and ordinary people can take a slice of the potential profits if they act now.