Should You Buy Dividend King Stock Pepsi Before October 8?

Despite sizable gains in the broader indexes, 2024 has not been a good year for PepsiCo (NASDAQ: PEP) investors. The stock price has fallen slightly year to date compared to a whopping 19% gain for Coca-Cola.

Pepsi will report its third-quarter earnings on Oct. 8 before market open. Here's what investors need to know about the dividend stock to help them decide if it is a buy now.

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Clearly defined expectations

Pepsi's second-quarter earnings report included an update to its full-year guidance. Pepsi now expects 4% organic revenue growth and a 7% increase in core earnings per share (EPS) to $8.15 compared to $7.62 in 2023. If Pepsi achieves that goal, it will have a price-to-earnings ratio (based on core EPS) of just 20.6 based on the current stock price. Investors may wonder why the stock is so cheap.

There are several factors at play, but the simplest is that Pepsi has been hit especially hard by pullbacks in consumer spending, even compared to its peers. Pepsi is noteworthy because it is a global business, and it owns Frito-Lay and Quaker Foods. Its brand portfolio is highly diversified, which can be an advantage because it reduces the dependence on a handful of brands doing well. But it can also be a disadvantage if some brands lack customer loyalty.

Until recently, Pepsi had done an excellent job using price increases to offset higher inflationary costs. But it seems to have hit a new level of resistance, as evidenced by volume declines across all segments (especially Quaker).

Pepsi has offset some of these declines with cost cuts, but the business simply isn't firing on all cylinders right now. Pepsi's July earnings call was chock-full of management commentary on cautious consumer spending behavior, weak demand, and analyst concerns that Pepsi has been increasing prices too much in recent years, making its products relatively expensive compared to alternatives.

Investors should monitor management's tone and commentary on the state of the consumer on this upcoming earnings call, as well as any updates to guidance. While Pepsi stands to benefit from lower interest rates, the effects of the rate cuts will likely take some time to impact its results. What's more, lower interest rates won't automatically help Pepsi, especially if they result in higher inflation, the Federal Reserve doubling back on its monetary policy, and a recession.

Capital allocation plans

Pepsi expects to return $8.2 billion to shareholders through $7.2 billion in dividends and $1 billion in buybacks.

In July, Pepsi raised its dividend by 7% to $5.42 per share per year, marking the 52nd consecutive year it has increased its dividend. Pepsi is in the elite category of Dividend Kings, which are companies that have increased their payouts for at least 50 years in a row.

Given the recency of the raise, Pepsi will almost certainly not announce another dividend increase until at least next summer. But we could hear an update on its stock repurchase plans, especially considering its recent acquisition.

On Oct. 1, Pepsi announced the $1.2 billion acquisition of Siete Foods. The company makes tortillas, salsas, seasonings, sauces, cookies, snacks, and other foods, and is known for its high-quality ingredients.

The acquisition shows Pepsi's willingness to invest throughout th economic cycle, even during periods of slowing growth. It may also indicate that Pepsi is trying to diversify its snack foods category with brands with pricing power and strong customer loyalty.

Speaking of high-quality brands, investors should also see if Pepsi provides an update on energy drink maker Celsius (NASDAQ: CELH). Pepsi has a stake in and a distribution agreement with Celsius. But Celsius has been struggling, and its stock price is now hovering around a 52-week low.

Just this past March, Celsius' market cap reached an all-time high of over $21 billion. But just seven months later, its market cap is now just $7 billion. While it's unlikely Pepsi would buy out Celsius, investors should look for any updates from Pepsi on the partnership and if Pepsi may entertain boosting its equity stake or giving Celsius a cash infusion.

In sum, investors should see how Pepsi plans to manage its capital spending and capital return program for next year, and if it may prefer mergers and acquisitions (M&A) over buybacks right now.

Pepsi is a balanced buy

Pepsi stands out as an excellent buy for patient investors. The business isn't at the top of its game, but the valuation is compelling. Pepsi's decision to raise its dividend by a sizable amount last July and buy Siete Foods showcases its profitability even during slowdowns. By comparison, lower-quality, less financially secure companies may have to pause buybacks, dividend raises, and M&A during a slowdown.

Pepsi's track record for dividend raises, paired with its 3.2% yield, makes it a passive income powerhouse that investors can be confident buying and holding for years to come.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.