Coca-Cola has been inferior to Pepsi in and even return rate is negative in past 10 years!

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Symbol of American Culture

Coca Cola is not only a representative of American culture, but also Buffett’s favorite.

Coca-Cola’s stock price performance in the last ten years

Investors who are familiar with U.S. stocks should know that Buffett’s favorite Coca-Cola (ticker: KO) has performed in the past ten years, far inferior to its main rival PepsiCo (ticker: PEP).

Figure 1: Coca Cola (orange) and Pepsi (green) stock price trend comparison chart in the past ten years (data from Charles Schwab)

Coca Cola’s financial figures for the past ten years

When I discussed the corporate moat on section 2-3 of my book “The Rules of Super Growth Stocks Investing,” I did mention that Coca-Cola has a strong brand advantage. But if we look at the performance of the past ten years:

Pepsi’s stock price rose 113.1%, while Coca-Cola rose only 44.71%.
The 10-year average ROE of PepsiCo is 41.14%, while that of Coca-Cola is only 28.61%.
Pepsi’s 10-year investment annualized rate of return (aka IRR) was 7.86%, while Coca-Cola’s was only 3.76%.
The annualized return of the S&P 500, which represents the broader U.S. stock market, is 12.9%.
The average annual GDP growth rate in the United States is 2.8%.

How does it compare to Pepsi?

Even in 2020, Coca-Cola’s annual revenue was 33 billion U.S. dollars, a year-on-year decline of 11% (for large stocks such as Coca-Cola, this figure is very, very poor; people will still be thirsty and hungry during the pandemic. Many people’s livelihood stocks and retail stocks have increased in performance, so the epidemic is not a reason); PepsiCo’s annual revenue was 70.372 billion U.S. dollars, a year-on-year decrease of 2.65%.

Although Coca-Cola’s current dividend yield is 3.16%, the income tax is deducted, included in inflation, and finally converted into real purchasing power; if you invest in Coca-Cola in the past ten years, you will not only be busy for nothing, but your real rate of return is likely to be negative! Might better to buy the brainless U.S. stock market ETF S&P 500 index.

Ｗhat is the reason?

There are many reasons, but the following points are not absent:

In addition to soft drinks, Pepsi is also actively developing snack items; unlike Coca-Cola, almost the entire empire is centered on soft drinks.
In the past two decades, sugary drinks have been defined by most people as synonymous with unhealthy (or even harmful) foods. McDonald’s (ticker: MCD) has a similar problem, but the problem is not as serious as Coca-Cola. A recent example is when Cristiano Ronaldo, one of the greatest contemporary football superstars, attended the European Cup football press conference on 6/14/2021, he was unhappy to take away the Coca-Cola on the table and hinted to drink water instead. Only healthy, this move caused Coca-Cola’s stock price to plummet that day, and its market value evaporated by 4.2 billion U.S. dollars.

What about dividends?

If you want to consider Coca-Cola and its dividends, as I showed in the “The Rules of Super Growth Stocks Investing” book, section 5-6, the dividend comparison table for super blue chips, it is better to consider Procter & Gamble (ticker: PG) and Colgate-Palmolive (ticker: CL), at least soap and shampoo will be soap and shampoo a few decades later. After a hundred years, everyone will still have to take a bath and wash their hair. This is one of the reasons why I disagree with Taiwan-style stock deposits (see my other blog post “Why I prefer growth stocks instead of value stocks?“) and advocate growth stocks investment.

In addition, Buffett’s Coca-Cola was bought decades ago because of its low cost of holding shares. At that time, its competitive analysis was no longer in line with the current situation. And he can receive a large amount of annual dividends (Coca-Cola is the third largest holding in Berkshire’s stock portfolio, as of December 31, 2020) and he can directly influence Coca-Cola’s board of directors (Buffett himself was a member of the Coca-Cola board of directors). In terms of investing in Coca-Cola in recent years, investors should not be influenced by him and insist on buying Coca-Cola.

There is no eternal moat

From this living example of Coca-Cola, it is once again confirmed that investors must track the dynamic of the companies in their portfolios. No matter how good its performance in the past, the past will pass. What we want is stocks to continue in the future. Can make money for us ─ ─ Is the company’s moat widened and is it still competitive? If you don’t advance, you will retreat. If your moat is not widened, competitors may actively strengthen its competitiveness, as a consequence which will weaken the competitiveness of those without progress.

In short, as I emphasized on section 5-4 of my book “The Rules of Super Growth Stocks Investing”, of course there is no permanent moat in the business world. Investors should keep their eyes open at any time and don’t be addicted to the past.

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