Coca-Cola valuation test steers defensive investors toward PepsiCo, Keurig Dr Pepper and bonds

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Coca-Cola valuation test and peers

Highlights

Coca-Cola trades at about $89 per share and 26 times forward earnings, with only modest upside implied by analysts and growing legal risk from a potential $14 billion IRS dispute.
PepsiCo and Keurig Dr Pepper trade at lower valuations—about 15 and 13 times next-12-month earnings, respectively—and offer higher dividend yields and upside potential, with PepsiCo's forecasted yield at 4.6% and more than 18% upside.
Keurig Dr Pepper targets $400 million in cost savings over three years from its $18 billion JDE Peet's deal, while Coca-Cola's A+ rated bonds provide a defensive fixed income alternative with yields above Treasurys.

Valuation pressure builds around Coca-Cola

As reported by CNBC, Coca-Cola remains one of the market's best-known defensive stocks, supported by decades of dividend growth, dominant global share in carbonated soft drinks and strong recent quarterly performance. The company raised full-year guidance after second-quarter organic sales rose 6%, comparable operating margin improved to 35.6% from 34.7% a year earlier and comparable earnings per share climbed 11% to 97 cents, ahead of consensus estimates.

Even so, the stock's valuation is becoming harder to justify for investors focused on downside protection and total return. At about $89 a share, Coca-Cola trades at roughly 26 times forward earnings, well above the S&P 500 multiple of 19, while analysts' average price target implies only modest upside. Its expected 2026 PEG ratio of 3.4 and dividend yield of 2.4%, slightly below the consumer staples average, further weaken the case for paying a premium.

The company also carries a specific legal risk tied to its transfer pricing dispute with the Internal Revenue Service. Coca-Cola is appealing after losing in U.S. Tax Court, and while it has deposited $6 billion with the IRS, the total exposure could rise by another $14 billion if the appeal fails.

Lower-priced alternatives offer defensive exposure

PepsiCo and Keurig Dr Pepper present alternative ways to seek defensive positioning with lower valuations and higher income potential. PepsiCo trades at about 15 times next-12-month earnings, below its trailing five-year average, and offers a dividend yield of 4.6%, while analysts' average price target suggests more than 18% upside from current levels.

PepsiCo's broader mix of beverages and food gives it a more diversified model than Coca-Cola, and investors are watching whether its North American turnaround gains traction. Its third-quarter earnings on Oct. 8 are likely to be a key test after management points to improving organic revenue and volume trends in the first half.

Keurig Dr Pepper trades even lower, at about 13 times next-12-month earnings, and is advancing a strategic reshaping of its coffee business following its planned $18 billion JDE Peet's deal. Management says early integration is progressing well and expects $400 million in cost savings over three years, while growth in Dr Pepper Zero Sugar is supporting the beverage portfolio.

For investors looking beyond equities, Coca-Cola's own debt is also emerging as a defensive option. With an A+ rating from S&P and bond yields now offering a modest premium over Treasurys, fixed income is becoming more appealing as higher starting yields improve protection in weaker markets.

Our earlier coverage of Turlock Irrigation District’s AA-rated revenue bonds highlighted how the utility’s strong operating management, steady revenue growth, and effective cost controls supported a high-grade credit profile. We also noted that the Stable Outlook reflected predictable rate-setting and a diversified customer base, offering investors more confidence in the reliability of income from the bonds.

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