PepsiCo Hasn't Been This Cheap Relative to Earnings in 6 Years. Here's Why That's the Signal to Buy.

Snack and beverage giant PepsiCo (NASDAQ: PEP) has struggled over the past few years. The stock began diverging from arch-rival Coca-Cola in early 2024. It has fallen by about 20% since then, while Coca-Cola has risen by 57%. Additionally, PepsiCo is now 30% off its all-time high, a rare drop for the legendary dividend stock.

Trading at just 17 times trailing-12-month earnings, PepsiCo hasn't been this cheap in about six years and, to that point, seldom falls to such low valuations. But PepsiCo has made mistakes that justify the stock's decline -- enough that an activist investor took a $4 billion stake in the company to help get the train back on its tracks.

Here's why the signal to buy shares now is glaringly strong.

Image source: The Motley Fool.

Working to right the ship

Most of PepsiCo's struggles lie in its core North America business. The company has raised prices over the years, and consumers started to push back. The rising popularity of obesity drugs, such as Wegovy and Zepbound, has only dialed up the pressure. Sales volumes have slumped, and growth has slowed.

Management has worked to course-correct its pricing, but North American beverage volume still fell 2% year over year in the third quarter of 2026, while food volumes were flat. Activist investor Elliott Management has been a proponent of cutting prices to boost volume and paring its U.S. product line to reduce costs.

Wall Street analysts currently estimate that PepsiCo will grow earnings by roughly 4% annually over the next three to five years. That's notably below Coca-Cola's 8% growth estimates, a sign that the current slump is weighing on the company's near-term upside. It goes a long way in explaining the stock's lackluster performance.

Cheap stocks aren't always strong buys. Here's why PepsiCo is.

An important part of being a long-term investor is assessing whether a business's model is broken or just a bump in the road that the company can overcome.

In PepsiCo's case, there's still so much to like. It dominates your local grocery store with a unique breadth of snack and beverage brands that consumers love. On top of that, management still plans to return $8.9 billion to shareholders through dividends and stock buybacks in 2026. That's a solid signal that management is confident in PepsiCo's stability and prospects going forward.

As I said above, the stock's valuation is uncharacteristically low right now. That gives investors a solid margin of safety in case PepsiCo doesn't get back on track as quickly as it hopes.

Shares yield a whopping 4.3% today and are backed by a huge balance sheet, making it unlikely that this Dividend King's streak of 54 consecutive annual dividend increases will face a cut. The dividend could drive that 4% growth rate to an annualized total investment return of 8%, and there's double-digit upside if the company can get earnings growth closer to Coca-Cola's 8% over the long term.

Cheap stocks aren't always smart buys. But here, there seems to be a lot more room for upside than downside in this beaten-down dividend stalwart.

Justin Pope has positions in PepsiCo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.