Why Shares of PepsiCo Are Rising Today

Key Points

• Activist investors take positions with the intent of urging for change at a company that might be struggling.

• PepsiCo, which owns some of the most well-known drink and snack brands in the world, has struggled to adapt to modern consumer trends.

• Elliott sees a big opportunity to turn around a business with huge scale and an enviable brand.

• 10 stocks we like better than PepsiCo ›

Shares of iconic beverage and snack company PepsiCo (NASDAQ: PEP) traded roughly 2.6% higher as of 11:51 a.m. ET today, although had risen as much as 6.2% earlier this morning. The move occurred after Elliott Investment Management, which is led by billionaire investor Paul Singer, purchased a $4 billion activist stake in the company.

A "historic" turnaround opportunity

PepsiCo has struggled in recent years, as competition in the food and beverage space has ramped up and consumer preferences have changed to favor healthier snacks and drinks with fewer chemicals and preservatives.

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PepsiCo has had an incredibly strong dividend track record, having paid and increased its dividend for 53 straight years. While the dividend is still safe, the company's free cash flow yield now trails the dividend yield, leading to some longer-term concerns if the company can't get its act together.

With its investment, Elliott is now a top five active investor in the company. In a letter and presentation to the company, Elliott said it sees a historic opportunity to rejuvenate the strong brand and create significant value for shareholders.

"Elliott's goals at PepsiCo are straightforward: help the Company sharpen focus, drive innovation, become more efficient, and unlock the value that its leading brands, unmatched scale and world-class employees deserve. The path back to winning is clear and achievable," the $70 billion asset manager said.

A value opportunity

PepsiCo's transformation won't happen overnight, and there's no guarantee of success in a competitive and changing market. But Elliott has succeeded on many previous activist campaigns, and PepsiCo's stock trades at less than 19 times forward earnings, below what it has traded at in the past. Also, investors can collect a healthy 3.75% dividend yield while they wait for change.

Management will go to all lengths necessary to avoid any kind of dividend cut, so I think investors can take a shot on PepsiCo here. It's a good bet to make if you are patient and looking for consumer staples exposure that generates passive income.

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Bram Berkowitz 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.