Send me real-time posts from this site at my email
Motley Fool

Better Buy: Verizon Communications vs. Coca-Cola

Verizon Communication (NYSE: VZ) and Coca-Cola (NYSE: KO) may not seem like the kind of stocks investors would be comparing when making investment decisions, but they have a lot more in common than you might think. They're both mature businesses that have a large competitive moat and pay a dividend that's one of the stock's most attractive features.

Where these companies diverge is in their growth prospects. Only one has the potential to get much bigger over the next decade.

Image source: Getty Images.

Where Verizon and Coca-Cola stand today

You can see below that Verizon and Coca-Cola have similar market caps, but very different revenue and net income figures. Verizon has nearly four times the revenue of Coca-Cola but just over double the net income.

VZ Revenue (TTM) data by YCharts. TTM = trailing 12 months.

This gives us a little bit of a feel for valuation and what kind of growth we might expect. Neither company is a growth machine, but Verizon's revenue is up 5% in the last five years while Coca-Cola's revenue has fallen 28%, partly because of the spinoffs of its bottling units. Still, Verizon's stock is trading at a discount no matter how you look at it.

A glimpse of the future

Coca-Cola has arguably hit the peak of its powers and is now in a downward trend. Soda consumption is being replaced by waters and juice drinks, which are healthier. The company has acquired some brands in those segments, but it's easier than ever for a start-up to gain awareness online or in niche grocery stores where Coca-Cola can't push them off shelves, as it has done in traditional retail channels.

Verizon has faced increased competition as 4G networks have gotten older and competitors have caught up to its early network lead. But now we're entering a world of 5G, and that's a game-changer. Verizon will have one of the first 5G networks nationwide and will be years ahead of the smaller (even if they merge) Sprint and T-Mobile, who were the ones selling customers on lower prices in recent years. The potential for 5G is enormous as devices from wearables to autonomous vehicles learn to use the lightning-fast download speeds. It's possible connections on Verizon's network will double, or go even higher, just from existing customers buying more connected devices over the next decade. That should add incremental revenue for the business and grow the bottom line as well.

Coca-Cola is a mainstay company, but it's not a growth machine because it's not riding a growing consumer trend or defining a new market segment. Verizon, on the other hand, is building a 5G network that could fuel a decade of growth. I think these companies have very different growth paths.

Where's the value?

If Verizon has more growth potential, it would make sense that it would have the higher P/E ratio and lower dividend. But the opposite is true.

Today, Verizon's P/E is 15.6, and it has a 4.1% dividend yield. Coca-Cola's P/E ratio is 33.2, and it has a 2.9% dividend yield.

Not only do I see better growth prospects for Verizon, it's also trading at a discount to Coca-Cola. That makes it the easy winner of this battle and shows why Verizon is one of my favorite stocks on the market today.

10 stocks we like better than Verizon Communications
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Verizon Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 1, 2019

Travis Hoium owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.


Popular posts

Welcome!!! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue