Coca-Cola, PepsiCo shares near $87 and $139

The latest 10-Q language from Coca-Cola is a reminder that the mechanics of valuation matter. The company says its capital priorities include investment in the business, dividend growth, portfolio enhancement through acquisitions and share repurchases. That is exactly why a terminal valuation built only on final-year capex, depreciation and working capital can be misleading. For a company like Coke, the more important question is whether incremental invested capital can keep earning an attractive return on net operating capital long after the forecast period ends. If that return weakens, terminal value can be overstated even when near-term free cash flow looks tidy.

PepsiCo tells a similar story from the other side of the equation. Its shares have bounced around a wide range this year, with technical indicators showing the stock recently back above its 50-day moving average after spending time below its 200-day average. That kind of recovery is welcome for momentum traders, but long-term investors should care more about the underlying engine: operating cash flow, capital spending and the company’s ability to defend returns in snacks and beverages. The June quarter filing shows Pepsi is still putting substantial cash into the business, which is the right move if those investments protect distribution, pricing power and shelf space.

For income investors, that is the heart of the thesis. Coca-Cola and PepsiCo are not purchased for explosive growth; they are owned for compounding. Dividends, buybacks and brand durability can create real wealth over many years, but only if the companies can continue reinvesting at returns above their cost of capital. That is why a terminal return on invested capital assumption is often more realistic than letting terminal free cash flow “fall out” of a spreadsheet. It forces investors to ask whether the business remains a compounding machine, not merely a cash dispenser.

There is also a portfolio lesson here. Both stocks can be valuable anchors in a diversified long-term portfolio, but neither deserves blind valuation assumptions. If terminal invested capital keeps growing while terminal returns drift lower, the stock may look safer than it really is. If, on the other hand, management keeps finding ways to earn solid returns on reinvestment — through pricing, mix, acquisitions or productivity — then the premium multiples these companies often command can be justified.

For investors, the takeaway is simple: don’t value Coca-Cola or PepsiCo by terminal free cash flow alone. Model the capital base explicitly, assume a sensible terminal return on invested capital, and let the long-term economics of the brands drive the conclusion. That’s a better way to think like an owner — and a better way to hold these stocks for the next 3 to 10 years and beyond.