Genius Billionaire Strategy: Coke or Pepsi?

Generation X doesn’t get a lot of attention. It’s sandwiched between the Baby Boomers and the Millennials – two large and influential groups that have an outsized impact on everything from workplace norms to the products and services that make it to market.

Gen X-ers were the last kids to grow up without internet access and the first to embrace MTV and video games. They were also the generation that lived through the Cola Wars of the 1980s – an experience that left a permanent impression and influenced their opinions on branding forever.

The Coke vs Pepsi debate was heated, and for a period, it was big news. Both brands pulled out all the stops to persuade consumers they had a superior product, and both made serious missteps along the way.

In the end, both came out looking a little worse, and neither made serious inroads in terms of expanding their market share. Cola drinkers settled back into their original habits, and investors stuck with whichever stock they liked before the Cola Wars began.

However, one billionaire bought Coke and Pepsi – a move that baffled retail investors. Why didn’t the Cola Wars persuade him to choose one over the other? Are there benefits to holding Pepsi stock and Coca-Cola stock in the same portfolio?

Who Won The Cola Wars?

Coca-Cola and Pepsi were introduced to the world towards the end of the 19th century, and Coke rapidly took a leadership position among consumers.

Through the better part of the 20th century, Coca-Cola raked in profits and expanded its empire while Pepsi struggled to find its financial footing. Eventually, it merged with Frito-Lay, but even that move didn’t give it an edge over its biggest rival.

In 1975, Pepsi came up with a brilliant marketing plan. It launched the Pepsi Challenge campaign, which had real people doing blind Pepsi vs. Coke taste tests. Pepsi was the preferred drink more often than anyone expected. Even Pepsi was surprised by the results.

As time wore on, Coca-Cola grew tired of being embarrassed by its poor showing in Pepsi Challenges, and it came up with a solution. The company would change the century-old formula for Coca-Cola to create a drink more like Pepsi.

New Coke was introduced with lots of fanfare, but it was instantly and thoroughly rejected by consumers. Worse still, loyal Coke drinkers were angry with the change and proclaimed themselves Pepsi converts. Pepsi branded itself as the “Choice of a New Generation,” and it finally started pulling market share away from Coke.

However, the progress was short-lived. Coca-Cola reversed course and brought Classic Coke back. Sales increased instantly, and Pepsi never outsold Coke again – though not for lack of trying.

The Cola Wars, as the ongoing feud between Coke and Pepsi came to be called, gave investors critical information about the two companies. One of the most important takeaways is that when one loses market share, it is picked up by the other.

Coca-Cola vs Pepsi Stock: Which Is Best?

Coca-Cola has a commanding lead over other carbonated beverage companies. Its share of the US market topped 46 percent in 2021, while Pepsi only had about 25 percent of the US market. However, from a shareholder perspective, Pepsi might still be the better bet.

Since 1983, Coca-Cola stock has returned more than 5,400 percent – an impressive accomplishment – but Pepsi stock is up by more than 8,000 percent for the same period. Coke stock is up about 34 percent in the past five years, while Pepsi stock has increased roughly 57 percent. Investors interested in growth opportunities might find Pepsi to be the best choice.

Income investors may prefer Coca-Cola for one simple reason: its dividend yield, which is currently 3.13 percent. Pepsi’s is a bit lower at 2.68 percent, which can make a significant difference for those with large stakes in the cola companies.

Coca-Cola is able to pay a larger dividend now – and is quite likely to increase dividends in the future – because it is far more effective at converting revenue to cash.

In 2022, Coca-Cola converted approximately $0.29 of each revenue dollar to cash. Pepsi only managed to convert around $0.09 of each revenue dollar to cash. That’s a big deal for investors who take a long-term perspective because it demonstrates greater financial strength and stability. For those investors, Coca-Cola stock is the best buy.

Why Did One Billionaire Buy Coke AND Pepsi?

One of the world’s best investors, Warren Buffett (net worth $106 billion), has had a long-term relationship with Coke that started in the midst of the Cola Wars. Buffett had been a Pepsi fan for almost 50 years before the Cola Wars peaked in the 1980s, but when he tried Cherry Coke, he was immediately hooked. In fact, in 1986 he made Cherry Coke the Official Drink of the Berkshire Hathaway Annual Meeting.

Buffett’s new allegiance to Cherry Coke coincided with a drop in Coca-Cola’s stock price – this was just about the time of the New Coke debacle. He started buying Coca-Cola stock, and he says he will never sell. Between dividend reinvestment, appreciation, and stock splits, Buffett’s holding company Berkshire Hathaway now owns around 400 million shares of Coca-Cola, which equates to approximately nine percent of Coca-Cola’s total outstanding shares.

Meanwhile, billionaire Ray Dalio (net worth $19.1 billion) has taken an entirely different approach to profiting from the Cola Wars. He decided to buy both Coca-Cola stock and Pepsi stock to ensure he enjoyed increasing share prices along with solid dividend yields.

Dalio’s theory is that both companies have their merits. The decades-long rivalry causes ebb and flow in their market share, sales volume, and profitability, and the beauty of owning both is that they have something akin to a negative correlation. When one loses market share, the other typically gains.

Dalio started buying Pepsi stock via his hedge fund, Bridgewater Associates, in early 2020. As of the firm’s most recent financial disclosures, Bridgewater has approximately 3.02 million shares of Pepsi stock. Bridgewater also owns around 8.4 million shares of Coca-Cola stock, which suggests that, like Buffett, Dalio believes Coca-Cola stock is the better long-term investment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.