Verizon (NYSE: VZ) and Coca-Cola (NYSE: KO) are both generally considered stable dividend stocks. However, Verizon's stock held up better throughout the COVID-19 crisis, slipping just 4% since the beginning of the year as Coca-Cola's stock tumbled about 13%. Let's see why the telecom giant outperformed the beverage maker, and whether or not the trend will continue over the next year.
Verizon faces near-term headwinds
Verizon's core wireless business, which generates most of its revenue, struggled with sluggish sales of smartphones and fierce competition from rival carriers last year. That's why its revenue grew just 1% in fiscal 2019, and its adjusted EPS rose just 2%.
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Verizon faced similar challenges in the first half of 2020, but the COVID-19 crisis exacerbated that pain by shutting down retailers and throttling the growth of its smaller Verizon Media advertising business, which mainly houses the remnants of AOL and Yahoo's internet assets.
As a result, Verizon's revenue fell 3% year-over-year in the first half of 2020, while its adjusted earnings remained unchanged. Verizon didn't provide any revenue guidance for the full year, but it expects its adjusted EPS to stay flat. Analysts expect its revenue and earnings to decline 3% and 1%, respectively.
But looking ahead, the upcoming launches of new 5G phones, ongoing fiber upgrades for its wireline business, and the expansion of its wireless network into connected cars and other devices could generate fresh tailwinds next year. As a result, Wall Street expects Verizon's revenue and earnings to rise 4% and 3%, respectively, in fiscal 2021.
Coca-Cola's growth fizzles out during the pandemic
Coca-Cola's organic sales grew 6% last year, as the ongoing expansion of its beverage portfolio beyond its carbonated drinks generated stable returns worldwide. Its comparable EPS, which tracks its organic sales, rose 1%.
Image source: Getty Images.
Unfortunately, the COVID-19 crisis hit Coca-Cola much harder than Verizon, as restaurants and other businesses that sold its beverages shut down. Its organic sales plunged 14% year-over-year in the second half of 2020, and its comparable EPS fell 16%.
That abrupt slowdown will likely delay Coca-Cola's expansion plans, which include its expansion of Costa Coffee and the introduction of new drinks like Coca-Cola Coffee and Coca-Cola Energy. It didn't provide any guidance for the full year, but analysts expect its revenue and earnings to decline 12% and 14%, respectively, inÂ fiscal 2020.
But if we maintain a longer-term view, Coca-Cola's sales could quickly rebound quickly after the pandemic ends. The launches of new products, including its Topo Chico hard seltzer, could also amplify that recovery. That's why analysts expect Coca-Cola's revenue and earnings to rise 10% and 14%, respectively, in 2021.
The valuations and dividends
Verizon trades at just 12 times forward earnings, while Coca-Cola has a much higher forward P/E ratio of 23. Coca-Cola underperformed Verizon this year, but its valuation suggests that investors still consider it a good defensive stock, and remain optimistic about its quick recovery.
Verizon pays a forward dividend yield of 4.3%, while Coca-Cola pays a lower yield of 3.4%. Verizon pays a bigger dividend, but its 13-year-streak of annual dividend hikes still can't match Coca-Cola's 58-year streak -- which makes it a Dividend King of the S&P 500.
However, Verizon spent just 48% of its free cash flow (FCF) on its dividend over the past 12 months, versus Coca-Cola's high cash dividend payout ratio of 99%. Coca-Cola's FCF should recover after the pandemic passes, but Verizon clearly has more room to raise its dividend right now.
The winner: Verizon
Verizon and Coca-Cola are still both solid long-term investments. However, Verizon's lower valuation, higher yield, and milder dependence on a quick post-pandemic recovery all make it a more compelling buy than Coca-Cola at current prices.
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