Better Bear Market Buy: Coca-Cola vs. Procter & Gamble

During a bull market, investors typically rotate from slower-growing blue-chip stalwarts to higher-growing stocks. But when a bear market begins, that trend reverses as investors rush back to playing evergreen and safer.

Coke (KO -0.22%) Y Procter & Gamble (PG 0.27%) are two of those defensive bear market actions. Coca-Cola beverage sales generally remain stable during economic downturns, as do sales of P&G’s well-established brands, including Tide, Pampers, Tampax, Charmin, Bounty, Gillette, Oral-B, Head & Shoulders, Pantene and SK-II. .

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Both stocks are also Dividend Kings, meaning they have increased their payouts annually for at least half a century. Coca-Cola has maintained that streak for 60 years, while P&G has done the same for 66 years. Both stocks are clearly safe long-term investments. But what is a more compelling buy right now, as the three-month bear market drags on? We’ll see.

The strong recovery of Coca-Cola after confinement

Soft drink consumption rates in developed markets have been declining since the early 2000s as consumers have shifted towards healthier beverages. However, Coca-Cola offset that slowdown by expanding its beverage portfolio with more brands of teas, juices, sports drinks, energy drinks, bottled water, coffee and even spirits. It also updated its flagship soft drinks with sugar-free versions, smaller serving sizes and entirely new flavors.

Coca-Cola’s business was not resilient to the pandemic. After growing 6% in 2019, its organic sales fell 9% in 2020 as restaurants closed to slow the spread of COVID-19. That loss of foodservice revenue offset its flat retail sales.

But in 2021, its organic sales increased 8% as the lockdowns ended. Coca-Cola now expects organic sales to grow another 12% to 13% this year, even as it halts its sales in Russia, navigates unpredictable “zero COVID” lockdowns in China and weathers inflationary and currency-related headwinds. It expects full-year comparable earnings per share (EPS) to grow 5% to 6%, and 14% to 15% on a constant currency basis.

Post-lockdown slowdown at P&G

Over the past decade, P&G has divested dozens of brands, including the 41 beauty brands it sold to Coti at the end of 2016, to optimize your business. Those efforts significantly reduced its expenses while reducing its expanding portfolio from approximately 180 brands in 2014 to just 65 brands today.

P&G organic sales increased 5% in fiscal year 2019, which ended in June of the calendar year. However, its organic sales grew 6% in both fiscal 2020 and 2021 as shoppers stocked up on more household products during the pandemic. Organic sales grew another 7% in fiscal 2022, but the company expects only 3-5% growth in fiscal 2023 as it raises its prices to compensate for slower shipments in an aftermarket. to the pandemic. Sales in China have also been disrupted by intermittent lockdowns.

As P&G’s sales growth cools, it expects its core EPS to grow only 0% to 4% in fiscal 2022 as it faces inflation, higher freight costs and a strong dollar. At constant exchange rates, you expect base EPS to increase between 6% and 10%.

What stock is the best value right now?

Coca-Cola trades at 24 times forward earnings and pays a forward dividend yield of 2.8%. P&G also trades at 24 times forward earnings, but pays a slightly lower forward dividend yield of 2.6%.

Coca-Cola and P&G look a bit pricey relative to earnings growth because they are obvious safe havens in this choppy bear market. Both stocks could hold up well as long as investors are scared, but their stretched valuations could also limit their upside potential. Once investors get greedy again, their currently inflated valuations could deflate.

That is why I would not rush to buy any of these defensive stocks at this time. However, Coca-Cola’s higher growth, higher dividends and simpler business model make it a much better buy than P&G for this grueling bear market.

leo sun has no position in any of the mentioned stocks. The Motley Fool recommends the following options: January 2024 Long Calls $47.50 on Coca-Cola. The Motley Fool has a disclosure policy.

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