The S&P 500 index is hovering around all-time highs. Who’s talking about bear markets? Try PepsiCo (PEP -1.51%), whose stock price has fallen roughly 30% from its 2023 peak at the time of this writing. That drop puts PepsiCo into its own, personal, bear market and should make this stock an attractive option for contrarian investors, value investors, dividend investors, and dividend growth investors. Here’s what you need to know.
PepsiCo is an industry-leading food stock
One of the first things to like about PepsiCo is its core business, which is selling food. But unlike many of its peers, it has a very diversified portfolio. It is probably best known for its namesake soda, which leads the company’s beverage business. But it is also the largest maker of salty snacks (Frito-Lay) and it has a material packaged food operation (Quaker Oats). Having multiple levers to pull helps on the growth front, and having multiple businesses to fall back on helps when times are tough.
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But there’s more to this story. PepsiCo has a global business, with powerful distribution, marketing, and R&D chops. It can stand toe to toe with any of its competitors. Moreover, given its large size, it has the wherewithal to act as an industry consolidator, buying smaller brands to help keep its portfolio relevant with consumers. It recently bought pro-biotic beverage maker Poppi and Mexican-American food company Siete Foods, for example. Overall, PepsiCo is an attractive business that has a history of being well run.
That is highlighted by the fact that PepsiCo is a Dividend King with over five decades’ worth of annual dividend increases under its belt. You simply can’t build a record like that without having a good business model that gets executed well in both good markets and bad ones.
It’s a bad time for PepsiCo
Unfortunately for PepsiCo, right now is one of the bad times. Growth has slowed down to a crawl and is lagging that of key peers. The company has stated that there are likely to be more headwinds in the near term, as well. But as the purchase of Poppi and Siete shows, the company is trying to make the changes it needs to improve its financial results. Given PepsiCo’s size, there’s just no way to turn this ship on a dime. It will take some time.
And that’s a huge opportunity for investors that think long term. Right now, PepsiCo’s price-to-sales, price-to-earnings, and price-to-book value ratios are all below their five-year averages. The dividend yield, at around 4.3%, is near the highest levels in the company’s recent history. If you have a value bias or an income bias, PepsiCo looks cheap today.
If you are a contrarian, meanwhile, you’ll appreciate that investors are treating PepsiCo with such disdain. Wall Street is acting as if it will be a perennial laggard to peers like Coca-Cola, when history shows that the two beverage giants often trade places, performance wise. So buying PepsiCo while it is lagging Coca-Cola means you are betting on the underdog, even though there’s no particular reason to suspect they won’t switch places again in the future.
The historically high yield and long history of dividend growth, meanwhile, will attract both dividend lovers and those who lean into growth and income stocks. Note that PepsiCo’s dividend grew at a 7% compound annual rate over the past decade. That means the dividend roughly doubled over that span, which is hard to complain about. While near-term dividend growth may slow down a bit, if PepsiCo can get back on the growth path, as it has before, dividend growth will probably pick up again.
Slow and steady leads to millionaire-sized wins
PepsiCo alone probably won’t turn you into a millionaire unless you invest a large sum of money in the stock today. However, it can be a key part of a more diversified portfolio, providing reliable growth over the long term in terms of both capital appreciation and dividend income. And it looks like the stock is on the sale rack, suffering through its own personal bear market, which could make now a particularly attractive time to buy it.
