Better Warren Buffett Buy: American Express vs. Coca-Cola

American Express (NYSE: AXP) and Coca-Cola (NYSE: KO) are two foundational holdings in Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) public equity portfolio. Not only has Berkshire held these stocks for decades, but they are also sizable positions.

American Express is Berkshire's second-largest holding behind Apple, with Berkshire owning 21.8% of the company. Berkshire owns 9.3% of Coke, which is its fourth-largest holding.

Here are some key similarities and differences between the two dividend stocks to help you determine which one is the better buy for you.

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American Express is showing no signs of slowing down

Over the last decade, American Express has produced a total return (dividends included) of 228% compared to Coke's 55% total return and 106% for the S&P 500 (SNPINDEX: ^GSPC). Without accounting for dividends, Coke's stock price is up just 35% over the last decade.

When American Express is at the top of its game, its business model is arguably better than Visa (NYSE: V) and Mastercard (NYSE: MA) because it acts as both the card issuer and payment processor. Visa and Mastercard, on the other hand, function as payment processors that collaborate with banks and financial institutions to issue cards. As the card issuer, American Express bears the risk of customers not paying their balances, but it has a track record of impeccable risk management as measured by its low net write-off rate (what American Express wasn't able to recover from a consumer or small business).

American Express is like the Costco Wholesale of the financial sector. It charges relatively high annual fees for its cards, but rewards cardholders with generous perks and points. That transparency is a win-win for American Express and its cardholders. Interestingly enough, American Express spends about twice as much on cardholder rewards as it collects in card fees. But it makes up for that deficit by charging merchants relatively high processing fees. In this vein, American Express cardholders are truly getting a good deal, so they are incentivized to use their cards for as many purchases as possible, which again benefits American Express with higher transaction fee revenue.

All told, American Express is arguably one of the best companies in the world. And despite beating the S&P 500 over the last decade, the stock is still a great value.

Coke is embracing changing consumer preferences

Coke's underperformance relative to American Express and the S&P 500 over the past decade makes sense considering the broader market gains have been driven by tech-focused growth stocks and cyclical companies that benefit from economic expansion -- like financials. However, there are plenty of reasons to be optimistic about Coke.

The consumer staples sector has been crushed by weak demand as consumers pull back on spending due to cost-of-living increases. But Coke has maintained its high operating margins and is generating decent volume and earnings growth, even as many other beverage, food, and restaurant companies are experiencing negative earnings growth.

Like American Express, Coke has arguably the best business model of its peer group. The company's network of bottling partners manufacture, package, merchandise, and distribute its branded beverages to customers and vending partners. These relationships reduce risk and make Coke flexible to changes in demand, trade policy, and cost inflation. The strategy is so effective that an activist investor is pushing PepsiCo to adopt Coke's capital-light model.

Coke has done a masterful job expanding its beverage portfolio through acquisitions and organic growth by branching outside of traditional soda to include low or zero-sugar sodas, coffee, tea, juice, energy drinks, and sparkling water. Coke is also moving to include cane sugar rather than high-fructose corn syrup as the primary sweetener in its Trademark Coca-Cola product range in the U.S.

Despite these efforts, Coke is still relying on its flagship product. In 2023, drinks made with the Coca-Cola label made up 44% of North American unit case volumes.

Coke isn't going away, but it wouldn't be surprising if its non-soda beverages outperform soda if wellness and health-conscious consumer trends persist. So investors should pay close attention to how Coke grows its international non-soda sales in the coming years.

Returning capital to shareholders

American Express and Coke are both great values and reward their shareholders with growing dividends and stock buybacks.

American Express has roughly doubled its dividend over the last five years. Its most recent increase was a 17% bump (announced in March).

Meanwhile, Coca-Cola is a Dividend King with 63 consecutive years of boosting its payout. Coke's longer track record of dividend raises and yield of 3.1% compared to 1% for American Express gives Coke the edge when it comes to dividend quality and quantity.

In Berkshire's annual letters, Buffett has written about the advantages of holding shares in companies that regularly use excess earnings to buy back their stock. Stock buybacks are arguably a better use of capital than dividends for growing companies because they reduce the outstanding share count and boost earnings per share. So over time, Berkshire has come to own a higher stake in both American Express and Coke without even buying more shares.

The better buy for you

American Express and Coke are both excellent stocks for long-term investors to buy now. American Express is the better buy for investors looking for more growth potential, while Coke is the better passive income play.

American Express is benefiting from relative strength from affluent consumers and businesses, which make up the bulk of its customer base, whereas Coke is getting hit harder by the overall pullback in consumer spending. So, it wouldn't be surprising to see American Express continue to outperform Coke if these economic conditions persist.

American Express is an advertising partner of Motley Fool Money. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Costco Wholesale, Mastercard, and Visa. The Motley Fool has a disclosure policy.