What Dividend King Pepsi's Recent Earnings Report Just Told Investors About the Broader Economy

Despite reporting disappointing third-quarter 2024 earnings on Oct. 8, PepsiCo (NASDAQ: PEP) stock rose modestly during the session likely because investors were expecting even worse results.

Pepsi is a global company that covers key food and beverage categories -- making it a bellwether in the consumer staples sector and a good yardstick for measuring consumer spending.

Here's are some key takeaways from Pepsi's results and earnings call and whether the dividend stock is a buy now.

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Pepsi's results aren't great

Pepsi cut its full-year organic growth guidance from 4% to a "low-single-digit increase" but kept its 8% earnings per share (EPS) forecast in check. Pepsi achieved the high end of its earnings target thanks to pricing power and a slew of cost-cutting programs.

On the earnings call, management made it a point to note that despite the difficult operating climate, it didn't shy away from making long-term investments, sustainability improvements, and mergers and acquisitions (M&A). On Oct. 1, Pepsi announced the $1.2 billion acquisition of Siete Foods. Pepsi also discussed why the acquisition would help expand its multicultural offerings and ability to deliver variety, value, and quality to consumers.

Despite the guidance cut, Pepsi held steady to its $8.2 billion capital return goal, consisting of $1 billion in buybacks and $7.2 billion in dividends. While no investor likes uncertainty or a company failing to meet expectations, it's important to understand that Pepsi had kept the same guidance since February -- which is impressive considering all the challenges it is going through. All things considered, slightly lower organic growth isn't too bad.

What is bad, however, is that Pepsi continues to see volume declines across its business units. In North America, Frito-Lay, Quaker Foods, and PepsiCo Beverages all reported lower volumes in the third quarter of 2024 compared to the same quarter last year. Overall, convenience foods and beverages volumes fell 2% for the quarter. Year to date, convenience foods volumes are down 2% and beverages are down 1%.

Companies like Pepsi grow earnings through acquisitions, organic volume growth, price increases, and stock repurchases, which reduce the outstanding share count and increase earnings per share. Of all those factors, lower volumes are perhaps the biggest red flag for a business because they indicate weakening demand. Whether due to better alternatives, competition, or something else, lower volumes signal a rift between the price Pepsi is charging and the perceived value from consumers.

U.S. consumers are watching their spending

In recent years, Pepsi had been rapidly raising prices to offset inflationary costs, which worked for a while. But that strategy is clearly running out of steam. The main focus of the Pepsi earnings call was how Pepsi is going to navigate medium-term consumer spending challenges.

Pepsi CFO Jamie Caulfield said the following when asked about the reason for lowering organic sales guidance: "On the revision from the 4% to low single digits, combination of recovery of the consumer in the U.S. frankly has been slower than we had anticipated, and then to a lesser degree, the geopolitics have impacted the international."

In addition to pricing pressure, consumers seem to be buying lower quantities of Pepsi products at a given time. Pepsi CEO Ramon Laguarta said on the third-quarter 2024 earnings call:

The other part of the business that with the pandemic, mobility and return to different patterns by consumers that has been impacted is multipacks, and variety packs was a huge driver of business. We're seeing that part of the business kind of slowing down a little bit, part is affordability, so some of the larger packs have been impacted. Now, we offer 10-count multipacks too -- before, it was more 18 and 24, now 10-count, that's growing very fast. Parts of the month, the consumers are gravitating toward lower purchase. That's growing very well.

If lower pack counts can help Pepsi boost margins, it could be a net positive for the business even at the expense of lower sales volume. Pepsi isn't the first company to speak of demand sensitivity based on the timing of the month -- as in when many folks get paid. Walmart CEO Doug McMillon discussed why end-of-month behavior can look different for lower-income individuals compared to higher-income people.

All told, Pepsi's report and management commentary painted a rather bleak outlook on the strength of the consumer. However, Pepsi seems to be navigating this environment well and continues to focus on long-term objectives rather than getting too caught up in economic cycles.

Still a reliable, blue-chip dividend stock

Pepsi stands out as a solid dividend stock to buy now because management is executing on what it can control, the stock is a good value, and Pepsi has a phenomenal dividend. Based on its core EPS guidance of $8.15, Pepsi would have a price-to-earnings ratio of just 21.2 -- which is a great deal for a blue-chip dividend stock.

In addition to its 3.2% yield, Pepsi has 52 consecutive years of dividend increases -- making it a Dividend King. Pepsi tends to focus more on raising the dividend, organic growth, and M&A than stock buybacks, so it's a particularly good buy if you agree with that capital allocation strategy.

Add it all up, and Pepsi remains a good stock to buy and hold even considering the difficult operating environment.

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