PepsiCo (PEP) - Get Report reported quarterly results last week, beating expectations and reinforcing the key reasons to purchase the stock. PepsiCo has a clearer and, as of today, brighter future than Coca-Cola (KO) - Get Report . The ongoing trends that drove PepsiCo's strong quarter suggest that the strategic differences between the company and Coca-Cola will only become more important going forward. For these reasons, PepsiCo remains a solid dividend stock.

Before we get into another PepsiCo vs Coca-Cola debate, here are the points from the company's quarter that stood out. PepsiCo's organic sales grew more than 7% (compared to 5% growth last quarter), with strength in both snacks (+10%) and beverages (+5%). Earnings per share, excluding currency effects, grew 14% compared to the prior year's third quarter.

While both companies are one of the 52 dividend aristocrats, recall that Pepsi is different from Coke as it relates to its mix of carbonated beverages (<30% of volume vs 70%+ of KO's volume) and snacks (30-40% of PEP's sales vs 0% for Coke). Pepsi also has 22 brands with sales greater than $1 billion compared to Coke's 20 billion-dollar plus brands.

Pepsi noted that beverage volumes were up 3% in Q3. However, carbonated soft drinks volume was down 1.9%, and non-carbonated beverages saw volumes rise nearly 10%. Pepsi's CEO Indra Nooyi stated, "Clearly the big story here is non-carbs and the non-carbs are really what's driving all of the growth in the whole industry...Regarding North American beverages, today more than ever, the portfolio is shifting to non-carbs. Innovation is becoming more fragmented and the life cycle of innovation is being shorter and the trade becoming more and more complex."

Clearly Pepsi is seeing and responding to the strengthening consumer trend away from carbonated soft drinks and toward healthier beverages. While many perceive the beverage industry to be slow-changing, Pepsi's comment that "the life cycle of innovation is being shorter" was especially interesting. The CEO's remark on how to analyze the beverage market's growth really drove these points home:

"I think focusing just on [carbonated soft drinks] is actually a thing of the past and I would strongly suggest everybody looks at total [liquid refreshment beverages], because that's the right way to look at the market going forward."

With no snacks and less than 30% of its global volume coming from non-carbonated beverages, Coke has much more work to do if it wants to continue growing its earnings. Coke has the global distribution network, brand, and financial firepower, but its massive size also slows the rate at which it can profitably diversify into products more aligned with secular beverage trends. The company will continue throwing off mountains of cash flow for decades, but the sustainability of its 21 times forward earnings multiple is questionable if profit growth stalls over the next five years.

Pepsi has been pushing all of the right buttons. The company noted it gained value share across ready-to-drink tea and water (large non-carbonated beverage categories), and its Frito-Lay snack business grew organic sales by 2%, topping expectations.

Once again, Pepsi was the largest contributor to U.S. retail sales growth among all food and beverage manufacturers with over $400 million of retail sales growth in all major channels. This was double the next largest contributor to growth! The company is an important vendor for most of its customers for several reasons.

According to the market research company IRI, 54% of consumers who buy salty snacks buy liquid refreshment beverages in the same basket. Selling both types of products, like Pepsi does, is preferable for customers because they only need one point of contact. Pepsi plays in product categories with some of the highest turnover rates in the food and beverage market. Within those categories, Pepsi's product turnover is also well above average, meaning it is moving its branded products out the door much faster than its competitors. In other words, Pepsi is the biggest contributor to cash flow for almost any customer it does business with, an extremely valuable partner that has arguably more than earned its premium shelf space.

Beyond the quarter, the long-term future looks bright for Pepsi. Foodservice is a $700 billion global market that will continue to around 3-4% per year going forward. While the $67 billion Pepsi generated in sales last year is a big number, it still represents less than 10% of the overall market and leaves plenty of room for expansion.


Dividend Review

From a dividend perspective, nothing has changed - Pepsi's dividend continues to score an extremely high Safety Score and an above-average Growth Score (66). Payout ratios, balance sheets, profitability trends, sales growth, industry cyclicality are evaluated to generate these scores.

Pepsi has increased its annual dividend for 43 consecutive years, growing its dividend per share at a compound annual growth rate of about 10% over the last decade and maintaining its status as one of the strongest dividend aristocrats. With a free cash flow payout ratio of about 50% and solid business growth, there is plenty of room for additional dividend increases in the years ahead.

Valuation

Pepsi trades at about 22 times forward earnings. This is hardly a bargain, but the stock is an example of a good company trading at a reasonable price. A position in Pepsi is one to hold for many years and wise investors might consider opportunities to add on pullbacks. Compared to Coke at 21 times forward earnings, Pepsi is the more attractive investment opportunity. From a dividend yield perspective, Pepsi yields 2.8% and Coke yields 3.1%, perhaps reflecting the market's recognition of Pepsi's clearer growth strategy.

This article is commentary by an independent contributor. At the time of publication, the author held a long position in PEP.