Coca-Cola (NYSE: KO) is a better buy today than Kraft Heinz (NASDAQ: KHC). But the real story is why this is the case. Answering that question not only helps to explain why you'll likely be better off buying the soda giant -- it also explains why some companies have business models that are just better than others.
Sure, Kraft Heinz could become a more attractive investment in time, which may interest turnaround investors. But the headwinds pushing Coca-Cola's shares lower right now are opening up a big opportunity for long-term dividend investors.
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Is Kraft Heinz's big yield enough?
Kraft Heinz is likely popping up on dividend investors' radar screens because it offers a lofty 5.4% dividend yield. To put that into perspective, the S&P 500 has a yield of 1.2%, and the average consumer staples company's yield is roughly 2.8%. If you like stocks that offer a lot of dividend income, Kraft Heinz has that covered.
Image source: Getty Images.
The problem is that Kraft Heinz has been a bit of a mess, business-wise, since Kraft and Heinz merged in 2015. The original expectation was that management would cut costs to boost profitability. That's a fine short-term plan, but it's a rather lousy long-term plan, since you can only cut costs so far before you start hurting the business. After a management overhaul, the food maker is now focused on supporting its most important brands while it looks to move away from less desirable ones.
That's a better long-term plan, and it has worked wonders for consumer staples peers like Procter & Gamble and Unilever. But it hasn't yet helped Kraft Heinz turn the corner with its business. The brands that management has been focusing on have been performing worse than the ones it isn't focusing on. Given enough time, it's highly likely that Kraft Heinz will manage to muddle through this period and get back on track, given its strong stable of brands.
But until that point, it is a turnaround stock, and dividend increases are likely on hold. Only more aggressive investors will want to own this stock over Coca-Cola.
Coca-Cola is down and looking attractive
Coca-Cola is offering investors a dividend yield of 3.1% today. While that's below the yield you'd collect from Kraft Heinz, it is soundly above the consumer staples average. So dividend investors should still find it relatively attractive. On top of that, the dividend has been increased annually for 62 consecutive years (making the company a Dividend King), which is a record that Kraft Heinz can't come close to matching. The average dividend increase over the past decade was a steady 4% or so.
That may not sound exciting, but slow and steady growth and an attractive dividend yield is a pretty good combination for conservative income investors. The dividend record here is backed by a business that has executed very well over time. Even though Coca-Cola really just does one thing -- selling beverages -- it does it exceptionally well.
That remains true despite the roughly 15% pullback from the stock's 52-week high. The big reason for the stock drop is mostly big-picture in nature, related more to things like new weight-loss drugs and the potential for an increase in health consciousness (among both individuals and, perhaps, regulators).
This pullback has pushed the price-to-sales and price-to-earnings ratios below their five-year averages. There's a compelling argument to be made that Coca-Cola is fairly priced to a little cheap right now. While the headwinds it faces are real, those same issues are also affecting Kraft Heinz. Only Kraft Heinz has other, internal demons to face as well.
KO Dividend Per Share (Quarterly) data by YCharts.
Focus on owning the best
If you are a long-term dividend investor, Coca-Cola's story is likely to be far more attractive than the turnaround theme surrounding Kraft Heinz. There's nothing wrong with buying Kraft Heinz. In time, it will probably get back on its feet again. But weak execution is a problem that has clearly left the company floundering. Only a small number of investors should buy a turnaround stock of this nature.
The outcome from buying an out-of-favor, but very well-run, company like Coca-Cola is more likely to end happily for long-term investors. The upside may not be as large (or the dividend), but the risk is much lower. Overall, Coca-Cola is likely the better option right now.
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Reuben Gregg Brewer has positions in Procter & Gamble and Unilever. The Motley Fool recommends Kraft Heinz and Unilever. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
