Introduction

Procter & Gamble and Coca-Cola have more in common than just age. Both are part of one of the most elite clubs in the stock market: the Dividend Aristocrats.

The 57 companies in this group have

• not only paid out dividends without fail for 25 years,
• but also increased the dividend payout every year over that span.

(In fact, P&G and Coke are a step higher on the ladder, as both belong to the Dividend Kings club – hiking their payouts annually for at least 50 consecutive years.) 

Coca-Cola vs Procter & Gamble dividend, data by Ycharts.

So which company will be the better dividend stock?

Procter & Gamble focuses on core brands

Dividend payout ratio

Dividend investors often take note of a company’s payout ratio. P&G’s dividend at first glance looks entirely unsustainable with a GAAP payout ratio exceeding 200% in FY2019.

Payout ratio is the percentage of earnings paid out as dividends.

But this metric is currently skewed because of writedowns in its Gillette shaving business.

• Men’s shaving habits are changing, and Gillette doesn’t do the business that it used to. Weak results from this segment led P&G to write off $8.3 billion in goodwill in 2019.

In FY2019, P&G paid out $7.5 billion in dividends ($2.90 per share), when it only had $1.43 in earnings per share on a GAAP basis. But the company said it had core EPS of $4.52, which accounts for the $8.3 billion goodwill write-off, then the payout ratio for 2019 was 64% – much more sustainable than 203%!

Revenue growth

In recent years, the company divested certain parts of the business that weren’t considered core, including 41 beauty brands sold to Coty in an $11.4 billion deal. These divestitures explain why P&G’s revenue has fallen from $70.7 billion in FY2015 to $67.7 billion last year.

By divesting some non-core assets, P&G has been able to increase focus on its core product categories, and the strategy appears to be working.

• In the first two quarters of FY2020, organic quarterly revenue is up YOY, including 5% growth in Q2. As the company finds ways to grow the top line,

it’s reasonable to expect bottom-line growth as well (GAAP EPS was up 16% in Q2), enabling future dividend increases. 

Coca-Cola improves profitability

Coca-Cola is much more than its namesake soda, having over 500 drink brands in its portfolio, they go beyond the carbonated-soda category and include water, tea, and coffee. This enormous portfolio allows the company to continually position itself to meet shifting consumer tastes, growing revenue in the process.

Organic revenue rose 6% in the first nine months of 2019: a welcome turnaround after overall revenue declined every year from 2013 to 2018.

• These declines were largely due to Coca-Cola refranchising its company-owned bottling operations.
• This move did reduce total revenue, but it made the company more profitable, as the five-year chart below demonstrates.

Coca-Cola revenue, net income, EPS, and operating margin, data by Ycharts. TTM = Trailing 12 Months.

Although a payout ratio is calculated with EPS, Coca-Cola’s management has stated that it’s targeting returning 75% of FCF to investors via dividends.

• Through the first three quarters of 2019, Coca-Cola generated $6.6 billion in FCF: up 41% YOY.
• This brings trailing-twelve-month FCF to $8 billion. Over this 12-month span, it paid out $6.7 billion in dividends, or 84% of FCF. 

Thus, Coca-Cola’s payout is above management’s stated goal, which is a little troubling. Still, with FCF improving, the payout is likely to move towards the target of 75% quickly.

The better buy today?

As we’ve seen, P&G has a stable dividend that should continue increasing. It raised its dividend by 4% last year, which what investors should expect going forward. Its current yield is over 2%.

Turning to Coca-Cola, its dividend payout is a little high. But considering its FCF growth, there doesn’t seem to be any real danger that Coca-Cola will cut its dividend. Last year, Coca-Cola increased its dividend by 2.5%. That level of growth seems to be within reach going forward. The stock’s yield is under 3%.

These potential dividend investments are very similar. Choosing one today, the author would pick Coca-Cola for its improving FCF and slightly higher yield. But in reality, he is not sure either of these companies is worth buying, as there are better dividend investments out there.

Content source: Quast. J. (2020) Better Buy: Procter & Gamble vs. Coca-Cola. The Motley Fool. Available from: https://www.fool.com/investing/2020/01/25/better-buy-procter-gamble-vs-coca-cola.aspx [Accessed 30 January, 2020]