When we think of Dividend Aristocrats, companies in the S&P 500 Index ($SPX) that have increased their dividends for at least 25 years, food and beverage companies might come to mind first. This is not without reason, as these companies tend to have stable businesses with predictable and linear earnings. In turn, this allows them to pay fat dividends. Moreover, these companies are typically cash-flow powerhouses. Given their mature business, they don’t have many avenues for investment, so they use the free cash flows for dividends or share repurchases.
Food and Beverage Companies Have Been Feeling the Heat
However, the going has been tough for food giants over the last few years. Consumer habits are changing, and shoppers are opting for newer and healthier alternatives. Many celebrities have launched popular snack and drink brands, giving established firms a run for their money.
Along with these two structural factors, food brands are also struggling from the near-term cyclical impact of high inflation and reduced spending power among low-and middle-income consumers.
Beverage companies like Coca-Cola (KO) and PepsiCo (PEP) have been feeling the heat, and PEP stock fell to a new 52-week low of $146.10 on Jan. 6. The stock has underperformed both rival KO and the S&P 500 over the last year and is almost flat over the last five years. However, I find it a good buy at these levels given its healthy dividend yield and tepid valuations.
Why Has PepsiCo Stock Underperformed?
PepsiCo has battled several headwinds over the last year, on the macroeconomic level as well as company-level. A stronger U.S. dollar, weak consumer spending, and higher inflation have harmed the sector and PEP is no exception. To make things worse, PepsiCo had some recalls that impacted its growth. Plus, the company saw what it called “outsized” growth in the previous three years, particularly for its Frito-Lay brand, and 2024 was always expected to be a year of “normalization.”
PepsiCo also faced a backlash from consumers as many believed it committed “shrinkflation,” lowering the quantity of food and drink its packages. PepsiCo also lowered its 2024 guidance during its third-quarter earnings call in October, blaming weak recovery in the U.S. consumer market and geopolitical issues. What’s encouraging, however, is that the company still expects its core constant currency earnings per share to rise by at least 8% in the year. This comes in close to the upper end of its long-term guidance.
PEP Stock Forecast
Of the 19 analysts covering PEP stock, 9 rate it a “Strong Buy,” one rates it a “Hold,” and one rates it a “Strong Sell.” The stock’s mean target price of $181.78 is 24% higher than the Jan. 6 closing prices while the Street-high target price of $200 is almost 37% higher. PepsiCo even trades below its Street-low target price of $148, which highlights how pessimistic markets have been toward the beverage giant.
What Lies Ahead for PepsiCo in 2025?
While PepsiCo will formally spell out its 2025 forecast when it releases its Q4 earnings next month, during the Q3 earnings call the company alluded that it expects growth to pick up in 2025 after slashing its 2024 organic sales growth forecast from 4% to “low single digits.” Brokerages are modelling a 3.2% rise in PEP’s 2025 revenue which is significantly higher than the 0.8% growth the company is expected to deliver in 2024.
PepsiCo’s Valuations Look Quite Tepid
PepsiCo has usually traded at a discount to Coca-Cola even as there have been periods when it has traded at a premium. Over the last 10 years, PEP has traded at a forward price-earnings (P/E) multiple of 21.3x while the corresponding multiple for KO is 22.06x. However, currently, PepsiCo trades at an NTM P/E multiple of 17.3x compared to Coca-Cola’s 20.88x. PepsiCo’s current valuations look quite tepid as not only is its valuation discount with Coca-Cola materially higher than historically, but it also trades at a discount to the average S&P 500 Index constituent.
PepsiCo Is a Dividend Aristocrat
PEP has increased its dividend for 53 years and the current yield of 3.7% is significantly higher than its historical averages. PepsiCo’s dividend yield usually goes that high only during periods of turmoil like the 2008-2009 Global Financial Crisis. While the company is currently facing multiple challenges, I don’t find them severe enough to trigger such massive underperformance of its share price, and by extension, such dividend figures.
Overall, for a conservative value investor looking to buy a dividend stock, PEP looks like a perfect fit as the company brings the prospects of both high dividends and reasonable capital appreciation to the table without undue risk. There is a lot of valuation comfort in PEP stock at these prices and a high possibility of making double-digit annualized returns over the next two years.
