Is PepsiCo Still a Refreshing Buy?

PepsiCo (NASDAQ: PEP) has become a household name. In fact, it's likely you have at least one of the company's products in your home right now.

However, investors need to consider more than the ubiquity of a company's product before purchasing the stock. You should analyze a company's prospects before committing to an investment.

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It's particularly imperative when the shares have dropped by quite a bit. In the case of PepsiCo, the stock has fallen about 23% over the last year through June 3.

It's time to take a closer look at PepsiCo to see if the market has overreacted to short-term concerns or whether the drop is foretelling long-term issues.

Image source: Getty Images.

Slumping sales

PepsiCo sells its beverages and food items under brands like Pepsi, Gatorade, and Quaker. However, even this large consumer staples company isn't immune from larger economic forces.

First-quarter revenue only grew about 1% compared to a year ago. Price increases contributed 3 percentage points but lower volume subtracted 2 percentage points. The company adjusted these figures to exclude foreign-currency translation effects and the impact of acquisitions and divestitures. On an adjusted basis, operating profitability dropped 1%.

Certainly, those numbers aren't very encouraging, and volume has been weak for some time. Investors would like to see higher volume driving faster revenue growth. However, it's important to remember that consumers have been weary from persistently high inflation that has squeezed their wallets, and tariffs add another level of uncertainty.

Management noted the economic challenges when projecting a low-single-digit percentage increase in revenue this year and flat earnings per share compared to 2024.

However, these short-term global economic factors don't change my optimistic view about PepsiCo's long-term prospects given its powerful brands. At some point, prices will stabilize and people will return to their more normal purchasing habits. When they do, it's hard to imagine they won't reach for a bottle of soda or chips sold under PepsiCo's umbrella.

Alluring dividends

If you like dividends, PepsiCo fits the bill. In fact, the company has built quite a track record.

The board of directors raised the company's quarterly dividend by 5%, starting in June. The new quarterly rate is $1.4225, or $5.69 annually. It's also a strong indication of management's and the board's confidence in PepsiCo's future.

Impressively, that marked 53 consecutive years with a dividend increase. That makes PepsiCo a Dividend King, which is a group of companies that have raised payouts for at least 50 years.

At the new annual dividend rate, the stock has a 4.3% dividend yield. That's much higher than the S&P 500 index's 1.3%.

Aside from its impressive track record and recent increase, PepsiCo can afford the dividends when looking at objective measures like the 78% payout ratio.

Buying opportunity?

PepsiCo's sharp stock decline has resulted in a better valuation. Its price-to-earnings (P/E) ratio has fallen from 27 to 19.

Of course, tepid sales and earnings growth will drive down a stock price and P/E ratio. While PepsiCo may never achieve rapid growth, the company should see a higher pace of revenue and earnings gains when broader economic policies return to a more normal state and consumers feel more comfortable spending money.

What should investors do? While investors looking for pure growth stocks may find better alternatives, if you're interested in dividends, PepsiCo makes a good choice. That's based on the stock's attractive yield and commitment to regular increases. Additionally, patient investors should benefit from a higher share price.

The prospect of an attractive total return adds up to a buying opportunity for those willing to wait for better economic times.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.