PepsiCo vs. Coca-Cola: Is the 25% Valuation Discount the Key to Outperforming in a Low-Growth Era?

In an era of muted economic growth and investor caution, the beverage industry's two titans—PepsiCo (NASDAQ: PEP) and The Coca-Cola Company (NYSE: KO)—offer contrasting investment propositions. While Coca-Cola commands a premium valuation and a legacy of stability, PepsiCo trades at a 25% discount to its rival, raising the question: Is this undervaluation the key to outperforming in a low-growth environment?

Valuation Metrics: A Tale of Two Giants

PepsiCo's forward price-to-earnings (P/E) ratio of 17, compared to Coca-Cola's 23, highlights a significant discount. This 26% gap suggests the market is pricing in near-term challenges for PepsiCo, such as its underperforming snack segment and North American beverage volume declines. However, this discount may be a mispricing of its long-term potential. PepsiCo's forward P/E of 17 is below its historical average of 22 and the beverage sector's median PEG ratio of 2.67x, indicating it is attractively valued relative to earnings growth expectations.

Coca-Cola, by contrast, trades at a premium, with a forward P/E of 23 and a market cap of $296.84 billion, up 10.34% in 2025. While its valuation reflects confidence in its brand strength and global distribution, it also implies higher expectations for growth. In a low-growth environment, such premiums often struggle to justify themselves.

Dividend Yields: PepsiCo's Income Edge

For income-focused investors, PepsiCo's 4% dividend yield is a compelling draw. This outpaces Coca-Cola's 2.9% yield and is supported by a payout ratio of 80.68%, reflecting strong cash flow generation. PepsiCo has raised dividends for 53 consecutive years, a testament to its financial resilience. Meanwhile, Coca-Cola's lower yield, while stable, is near a 10-year low, signaling a shift in market dynamics.

PepsiCo's dividend sustainability is bolstered by its $5.56 per share in dividends over the past 12 months, despite operational headwinds. Coca-Cola's 71% payout ratio offers more flexibility for future increases, but its yield pales in comparison to PepsiCo's current income appeal.

Strategic Divergence: Innovation vs. Stability

PepsiCo's strategy hinges on innovation and diversification. Its recent acquisitions of Siete Foods and Sabra, along with AI-driven supply chain optimizations, position it to capitalize on health-conscious trends and cost efficiencies. The company's push into functional beverages, such as prebiotic cola and probiotic drinks, aligns with a $174 billion market projected to grow at 15.3% annually.

Coca-Cola, meanwhile, relies on its beverage-centric model and third-party bottling structure to preserve margins. Its recent 71% surge in net profit (Q1 2025) underscores its operational strength, but its growth in developed markets is stagnant. PepsiCo's broader portfolio—spanning snacks, packaged foods, and beverages—offers a buffer against sector-specific volatility.

Risk and Reward in a Low-Growth World

PepsiCo's valuation discount and higher yield make it a compelling case for income investors willing to tolerate near-term volatility. Its 12% stock rebound from June 2024 lows suggests growing confidence in its turnaround. However, its near 100% payout ratio leaves little room for reinvestment, and its snack segment remains a drag.

Coca-Cola's premium valuation and conservative payout ratio (71%) offer stability, but its lower yield and reliance on a single sector may limit upside in a low-growth environment. For investors prioritizing capital preservation, Coca-Cola remains a defensive play.

Conclusion: A Case for Contrarian Investing

In a world where growth is elusive, PepsiCo's 25% valuation discount and 4% yield present a compelling opportunity. Its strategic pivot toward health-conscious products, cost efficiencies, and international expansion could drive a re-rating of its stock. While Coca-Cola's premium valuation reflects its brand strength, it may underperform in a scenario where income and value are prioritized.

For income-focused investors with a medium-term horizon, PepsiCo offers a higher yield and undervaluation that could translate into outperformance. However, those seeking stability and long-term capital preservation may still favor Coca-Cola. The key lies in aligning one's risk tolerance with the company's strategic trajectory.