Coca-Cola Classic and Diet Coke no longer hold the #1 and #2 market share positions in the U.S. soda world. A report issued by Beverage Digest shows that Pepsi has overtaken Diet Coke as the #2 soda by market share in the U.S. The image below from Beverage Digest shows the Top 10 sodas in 2014:

Soda volume in general has been declining in the U.S. for several years. The image above shows that diet soda volume is declining even faster. Consumer demand for ‘real’ ingredients and healthier products is driving the shift away from soda in general and diet sodas in particular. Of the 4 (counting Coke Zero) diet sodas on the list above, volume plummeted for each of them:

• Diet Coke volume down 6.6%
• Diet Pepsi volume down 5.2%
• Diet Mountain Dew volume down 3.2%
• Coke Zero volume down 2.0%

Despite a general negative trend in soda volume, 4 of the top 10 soda brands actually posted positive volume gains. These 4 are below:

• Fanta volume up 5.0%
• Sprite volume up 1.0%
• Dr. Pepper volume up 0.5%
• Coke volume up 0.1%

Don’t Write Sodas Off Just Yet

Change away from soda has been slow. The top 4 ready to drink beverages by market share are still sodas. The ready to drink beverage market is fragmenting. Sodas still hold the top position – by a long shot – but their dominance is slowly weakening. The soda industry is comparable to the tobacco industry several decades ago.

This may sound like a negative statement, but it’s not. Top tobacco stocks like Philip Morris International (PM) and Altria (MO) continue to reward shareholders with rising dividend payments and growing earnings year after year. Cigarette sales may be declining in developed countries – which is a good thing – but cigarette corporation profits are growing as they continue to rake in billions in stable and predictable cash flows from selling an addictive product. Products like Coca-Cola and Pepsi are similar.

Despite declining soda volume, both PepsiCo (PEP) and Coca-Cola (KO) continue to grow earnings-per-share. The table below shows the company’s earnings-per-share growth over the last 10 years.

Coca-Cola or PepsiCo for Your Investment Account?

Both Coca-Cola and PepsiCo have seen impressive growth over the last decade. The two are by far the largest players in the soda industry. PepsiCo has a $142 billion market cap while Coca-Cola has a $176 billion market cap. The sections below will analyze both companies over a variety of different metrics to determine what will likely make the best investment for dividend growth investors going forward.

Brands: Coca-Cola Vs. PepsiCo

Coca-Cola has 20 brands that generate over $1 billion per year in sales, while PepsiCo has 22. All 20 of Coca-Cola’s billion dollar brands are in the beverage industry, while PepsiCo has 14 billion dollar beverage brands and 8 billion dollar snack brands.

With soda volume slowly declining, still brands are becoming increasingly important. The table below lines up Coca-Cola’s still brands with PepsiCo’s:

As the table above shows, Coca-Cola now has 14 non-carbonated brands that each generate over $1 billion per year in sales. The company has done an excellent job of slowly shifting its beverage portfolio toward still beverages, in line with consumer demand. PepsiCo cannot match Coca-Cola’s still beverage portfolio, although it does have several strong brands of its own.

Of the two, PepsiCo’s brand portfolio is more heavily concentrated on sodas than Coca-Cola’s brand portfolio. Interestingly, beverages are not nearly as important to PepsiCo as they are to Coca-Cola; PepsiCo now generates more than 50% of its operating income from its food and snack brands, which include the Frito-Lay and Quaker brands.

Coca-Cola has the edge in still brands, and has the world’s leading carbonated brand (Coca-Cola), but PepsiCo’s Frito-Lay brands are the most popular chip brands in the world. PepsiCo’s dual strategy of investing in both beverage and food brands has resulted in increased stability. The company has a long-term stock price standard deviation of just 17.3%, versus 18.5%.

Dividends: Coca-Cola Vs. PepsiCo

Both company’s dividend yields are shown below:

• Coca-Cola: 3.3% dividend yield
• PepsiCo: 2.7% dividend yield

Coca-Cola has the higher current dividend yield. Coca-Cola has a higher payout ratio as well; 59.4% versus 56.7% for PepsiCo. With that said, both companies have similar yields and payout ratios. Coca-Cola has a slight edge in both current yield and length of dividend payments. Coca-Cola has paid increasing dividends for 53 years, while PepsiCo has been paying increasing dividends for 43 years. Both streaks are extremely impressive, and both companies are members of the exclusive Dividend Aristocrats Index.

Growth: Coca-Cola Vs. PepsiCo

PepsiCo outpaced Coca-Cola’s growth in 2014. PepsiCo grew constant currency earnings-per-share 9%, while Coca-Cola grew at 7%.

Both companies are employing similar growth strategies. Both Coca-Cola and PepsiCo are expanding internationally where consumers purchase less of these 2 companies’ products per capita. PepsiCo is realizing faster growth due to its Frito-Lay brands. The company’s Frito-Lay brands are not fighting the same negative publicity and headwinds that soda brands are experiencing. Coca-Cola’s still beverage portfolio is impressive, but it cannot match the growth prospects of PepsiCo’s combined still beverage and salty snack portfolio.

In carbonated beverages, Coca-Cola has the clear advantage. The company’s Coca-Cola brands is among the most valuable in the world. Despite this, soda volume in general is declining and the company must fight much negative press in its most iconic brand. All told, PepsiCo currently has a growth advantage over Coca-Cola thanks to its diversified product offerings.

Valuation: Coca-Cola Vs. PepsiCo

Coca-Cola currently has a price-to-earnings ratio of 19.5, versus 20.7 for PepsiCo. At first glance, this would make Coca-Cola the better value. With PepsiCo expected to have slightly faster growth than Coca-Cola over the next several years, the valuation scale is evened. Both companies appear to be fairly valued for high quality businesses at this time. Neither holds an edge in valuation over the other.

Final Thoughts

PepsiCo is the better investment over Coca-Cola at this time. PepsiCo’s Frito-Lay brands put them over the top versus Coca-Cola. With that said, Coca-Cola has the better beverage portfolio by a wide margin. Investors looking for a pure play in beverages will do well with Coca-Cola. Investors looking for broader exposure in beverages and packaged foods will likely see slighter better returns with PepsiCo.

Both companies are favorites of The 8 Rules of Dividend Investing, but PepsiCo has consistently outranked Coca-Cola thanks to its faster growth rate and lower stock price standard deviation. PepsiCo’s better diversified brand portfolio gives it slightly lower business risk than Coca-Cola, which is reflected in the company’s lower stock price standard deviation.