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Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) are two of the most recognizable dividend stocks. Both are Dividend Kings, as companies with over 50 years of annual dividend increases. They also currently offer higher yields than the average stock.
However, their current valuations and relatively modest earnings growth prospects could limit their returns over the next decade. Investors looking for a better combination of income and growth might want to consider another familiar food company: McCormick (NYSE:MKC). It currently yields more than 4%, and its transformative acquisition of Unilever's (NYSE:UL) food business could help grow a $1,000 investment to around $2,600 over the next decade, a 160% return. That's higher than the projected returns of both Coke and Pepsi.
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Coke and Pepsi are incredible businesses. Coke is performing especially well these days. The beverage giant's revenue grew 7% in the third quarter, supported by 5% growth in global unit case volume. That helped drive an impressive 11% increase in its comparable earnings per share (EPS). The beverage giant's strong showing gave it the confidence to raise its full-year outlook. It now expects to deliver at least 5% organic revenue growth and 11% comparable EPS growth in 2026.
The problem with Coke is that it's trading at a premium valuation. At its recent price of $97 per share, Coke trades at 29x earnings. That's above both the S&P 500 (22.4x) and Nasdaq-100 (27x). It's why Coke's dividend yield is currently down to around 2.2% despite its continued growth.
Pepsi is not performing quite as well as Coke these days due to headwinds facing its North American business. While its revenue rose 5.6% in the third quarter, core EPS rose only 2%. As a result of its continued headwinds, Pepsi cut its core EPS guidance from around 5% growth to about 3%.
Due to its headwinds, Pepsi currently trades at a more attractive valuation of around 17x core EPS. That much lower valuation is a big reason why it has a higher dividend yield than Coke, at around 4.1%.
McCormick is a global leader in flavor. The company makes, markets, and distributes spices, seasonings, condiments, and flavors across several popular brands, including McCormick, French's, Frank's RedHot, and Old Bay. While it doesn't have quite the dividend record as Coke (64 years of dividend increases) or Pepsi (54), it has paid dividends for 102 straight years and raised its payment for 40 years in a row.
The flavor supplier delivered a 17.4% sales increase in the third quarter, though most of that was due to the acquisition of McCormick de Mexico (organic sales growth was only 1.9%). Meanwhile, its adjusted earnings only rose 1.2%. For the full year, McCormick expects to deliver 2% to 5% adjusted EPS growth. At the midpoint, it trades at about 15x earnings.
McCormick's valuation is a bit depressed right now due to its pending merger with Unilever's foods business. It's a massive deal as Unilever Foods is about twice McCormick's size. Unilever Foods has a global portfolio of flavoring and cooking aids, condiments, sauces, and other food products led by Knorr and Hellmann's. The combined company would have $20 billion in annual revenue (McCormick's sales were $7 billion last year). McCormick expects to realize $600 million in synergies from the deal, which will boost its earnings over the next few years.
I ran through several scenarios on the returns these three global consumer staples companies could deliver over the next decade. I settled on a rather conservative base case that uses the following assumptions:
Data source: Company investor relations websites and the author's calculations.
Here's a look at the projected growth of $1,000 invested in each of these companies over the next 10 years:
As that chart shows, McCormick would deliver the highest total returns (about 160% overall). That's despite assuming lower earnings and dividend growth over the next ten years. The biggest differentiator is that McCormick should get a meaningful boost from its transformational acquisition of Unilever's foods business over the next few years, and eventually achieve a higher valuation multiple once it completes that integration and deleverages its balance sheet.
There are higher risks associated with investing in McCormick, as it could be biting off more than it can chew with the Unilever Foods acquisition. However, its lower starting valuation provides a bigger margin of safety. That's why I think it's a great place to invest $1,000 right now.
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Matt DiLallo has positions in Coca-Cola, McCormick, and PepsiCo. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.
Got $1,000 to Invest? Skip Coca-Cola and PepsiCo. This 4%-Yielding Dividend Stock Could Deliver a 160% Return in 10 Years. was originally published by The Motley Fool
