IBM vs Coca-Cola – The Motley Fool

It may seem stupid to compare IBM (NYSE: IBM) with Coca-Cola (NYSE: KO) . One is an aging tech company and the other sells soda and other drinks. But the two companies have similarities: they own aging core businesses, they are trying to increase growth with acquisitions, and they are both considered reliable revenue objects.

IBM and Coca-Cola were also both holders of Warren Buffett's Berkshire Hathaway . Still, Berkshire sold all of its shares in IBM last year, while retaining an almost $ 20 billion stake in Coca-Cola.

Image Source: Getty Images.

Berkshire's decision suggests that Coca-Cola is a better stock than IBM for long-term income investors? Let's compare the two as dividend investments to find out.

Comparison of Big Blue and Coke & # 39; s Dividends

IBM currently pays a dividend yield of 4.6%, increasing its payout annually for over two decades. Coca-Cola pays a lower dividend yield of 3.5%, but it has increased its yield annually for more than five decades.

Over the past 12 months, IBM has spent 50% of the cash flow (FCF) and 65% of EPS on dividends. In the same period, Coca-Cola used over 100% of its FCF and EPS on its yield – mainly due to the refinancing of its bottle operation. Coca-Cola's payout ratio should eventually fall below 100% after it has completed these restrictive features, but the dividend is currently less sustainable than IBM's.

Free cash flow growth

Both Coca-Cola and IBM generate enough of the FCF,

IBM Free Cash Flow (TTM) Chart "src =" https://media.ycharts.com/charts/c9fcbb6fe30731605db3632ef4d8a960 .png "/>

Source: YCharts.

IBM expects to generate $ 12 billion in FCF this year, and Coca-Cola says it expects to generate" at least "$ 6 billion in FCF However, both companies' FCF growth will be fueled by their recent acquisitions.

IBM spends $ 34 billion to buy Red Hat (NYSE: RHT) to strengthen its higher-growth strategies "Companies (cloud, mobile, analytics, security and social), and Coca-Cola have recently completed the acquisition of Costa Coffee at $ 4.99 billion.

These acquisitions reduce both companies' confidence in their slower businesses. IBM is excited by its older tech companies, while the demand for Coca-Cola's carbonated soft drinks slows down in connection with health problems and changing consumer tastes.

That's why IBM gets a growing list of shooting companies and why Coca-Cola is expanding its portfolio of tea, juice, energy drinks and bottled water. These inorganic growth strategies prioritize sales growth over earnings growth, so investors shouldn't be surprised if both companies' FCF levels dive through 2019.

Image Source: Getty Images.

Growth Forecasts and Valuations

Wall Street expects IBM's revenue to fall by 2% this year, and revenue will rise less than 1%. IBM believes that the acquisition of Red Hat, which is set to close in the second half of the year, will increase its sales growth back to positive territory over the next five years.

Analysts expect Coca-Cola's revenues and revenues to increase 9% and 1%, respectively, this year. On an organic basis, which excludes acquisition-related gains (especially from Costa), Coke expects sales to increase by 4%.

Coca-Cola is growing faster than IBM, but in the future P / E of 20 is much higher than IBM's future P / E of 10. Comparing P / E conditions for two companies in different industries is apple-to-oranges matchup , but they tell us that investors are still willing to pay a higher premium for Coca-Cola than for IBM.

Why Investors Should Follow Buffet's Leadership

IBM won't be outdated anytime soon, but it is starving for growth and faces formidable rivals like Amazon.com and Microsoft ] in the shooting service. Buying Red Hat is a step in the right direction, but it's not a magic cold.

Coca-Cola also struggles, but the hoof winds are not as serious. Buying other beverage brands and changing the core soda heat with healthier versions can boost sales growth, while tighter cost controls and the completion of their regressive efforts should pave the way for healthier earnings growth.

I'm not busy buying either stock now. But if I had to choose one as a revenue game, I would choose Coca-Cola over IBM, as the core business faces fewer challenges. IBM pays a higher dividend and trades at a lower number, but is charged by its older businesses and faces fierce competition from Amazon and Microsoft.

John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fools Board. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fools Board. Leo Sun owns shares in Amazon. The Motley Fool owns shares and recommends Amazon and Berkshire Hathaway (B shares). Motley Fool owns shares in Microsoft. Motley Fool is short share in IBM. Motley Fool has a disclosure policy.