Coca-Cola: The Surprising Reason Investors Should Choose Its Stock Over PepsiCo's

Coca-Cola (NYSE: KO) stock is riding high following its second-quarter earnings report. The cola giant beat revenue and earnings estimates, and products like Diet Coke and Coke Zero delivered a particularly strong performance.

Nonetheless, a surface-level analysis of Coca-Cola versus archrival PepsiCo might persuade investors to choose the latter. After all, PepsiCo sells for a lower P/E ratio and its dividend yield is significantly higher. Also, even though Coca-Cola was one of Warren Buffett's most famous investments, Berkshire Hathaway has not purchased a single share since 1994.

Fortunately for Coca-Cola bulls, a surprising reason may keep investors in Coca-Cola stock.

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Why Coca-Cola is the beverage stock of choice

As previously mentioned, PepsiCo's 19 P/E ratio is well below Coca-Cola's earnings multiple of 27, a surprisingly high premium given the companies' similarities.

Also, PepsiCo's 4% dividend yield is well above Coca-Cola's return of 2.3%. Both stocks are Dividend Kings by virtue of having increased the dividend annually for more than 50 years. Thus, PepsiCo seems to have an advantage with income investors.

However, Coca-Cola stock has delivered higher overall returns despite those advantages. Moreover, this is not a temporary phenomenon. Thanks to a breakout in April, Coca-Cola's returns exceeded those of PepsiCo over the last year. Additionally, in nearly every time period going back to 1990, Coca-Cola has outperformed its archrival.

KO Total Return Level data by YCharts

Some subtle differences in Coca-Cola's business model may explain its outperformance. Unlike PepsiCo, Coca-Cola outsources all bottling, trucking, and distribution to third parties. That makes it a comparatively asset-light business, and without those expenses, it earns higher operating margins than PepsiCo.

Furthermore, despite its more than 200 brands, Coca-Cola remains exclusively a beverage business. In contrast, PepsiCo's ownership of food brands such as Frito-Lay and Quaker also places it in a business that has higher input costs.

Consumers have also turned against packaged foods in favor of more natural or organic options, which serves as another headwind that Coca-Cola does not face. In the minds of some investors, those advantages might justify Coca-Cola's higher premium.

Choosing Coca-Cola stock

Coca-Cola has attracted a premium valuation amid a comparatively asset-light business model that generates higher margins.

Admittedly, income-oriented investors should probably choose PepsiCo for its much higher dividend yield. Also, Coca-Cola trades at its steepest premium to PepsiCo in years.

However, in my view, Coca-Cola stock justifies that higher valuation. Ultimately, overall returns are what are important to most investors, and Coca-Cola has met that criterion nearly every time period.

Moreover, Coca-Cola's consistently higher margins make it less likely PepsiCo is going to fully close that valuation gap. Thus, investors should expect that outperformance to continue.

Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.