1 Dividend Growth Stock Down 20% to Buy Right Now

PepsiCo (NASDAQ: PEP) stock is trading down nearly 23% from highs set in May 2023. That's technically a bear market-type of pullback for this consumer staples giant.

If you are a dividend growth investor, right now is the time to buy PepsiCo. Here's why.

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What does PepsiCo do?

PepsiCo is a consumer staples company, which means it makes products that people buy in both good markets and bad. The products it sells are also small, so they are relatively easy to afford. And the company's brands tend to engender loyalty from consumers, which increases the likelihood of purchase even during recessionary periods.

Image source: Getty Images.

As far as the specific products that PepsiCo makes, it is probably best to lump it into the food space. That, however, isn't exactly a clean fit because PepsiCo's namesake brand is a beverage.

In fact, the company makes a broad array of beverages. But it also produces snacks under the Frito-Lay brand and packaged food products in its Quaker Oats business. It is a dominant company in both beverages and salty snacks, and holds its own in packaged foods.

All in, PepsiCo is actually one of the most diversified food stocks you can buy. That includes both its product mix and the fact that it sells its goods in over 200 countries around the world. As you might expect, it has a very strong distribution system and a marketing arm that can stand toe to toe with just about any of its consumer staples peers.

Why buy PepsiCo right now?

So PepsiCo has a large and attractive business. It also has a historically high 3.5% dividend yield that is backed by 52 consecutive annual dividend increases. That dividend streak is impressive, especially since you can't build a record like that by accident. It requires a strong business playbook that gets executed well in both good times and bad.

Stocks that manage this level of performance join the highly elite group of Dividend Kings (50-plus annual dividend increases). PepsiCo is clearly a reliable dividend growth stock, and its 10-year compound annual dividend growth rate is around 7%. That's about twice the historical growth rate of inflation.

PEP data by YCharts

The historically high yield, meanwhile, suggests that PepsiCo is on sale right now. More traditional valuation metrics, like the price-to-sales and price-to-earnings ratios, back that up. Both are currently below their five-year averages.

So, PepsiCo looks like a dividend growth stock with a strong business that has been put on the sale rack. If you can handle taking contrarian positions, it could be a great fit for your portfolio.

What's wrong with PepsiCo?

From a big-picture perspective, there is nothing wrong with PepsiCo. Even well-run companies eventually go through difficult periods performance-wise. However, Wall Street tends to think short term, so PepsiCo's current headwinds have left investors downbeat on the shares. This is an opportunity for dividend-focused investors who think long-term.

Part of the problem today is that PepsiCo's performance coming out of the pandemic was particularly strong. High inflation allowed the consumer staples company to aggressively raise prices. Now that the price hikes are behind it, top-line growth has slowed down. That's not shocking at all, and it is an issue impacting many of the company's peers as well.

PepsiCo has been through periods like this before and is, in fact, already making moves to improve performance. The most notable decision was the growth-enhancing purchase of Siete Foods, a purveyor of Mexican/American foods.

That said, PepsiCo is more exposed than other consumer staples companies to the potential demand impact of new weight loss drugs. And it is also more exposed to the risk posed by increased health consciousness among consumers and regulators. Both of these facts stem from its focus on beverages and snacking. It might take the company a little while to reposition, but it is difficult to believe that PepsiCo won't adjust as needed on either front.

PepsiCo probably won't rebound in 2025

Still, there's one important thing to keep in mind: PepsiCo is likely to turn its business around, but it probably won't do so overnight. It could take several years, but the historically high yield means you are being paid well to wait.

In fact, management was pretty clear that 2025 would see just low-single-digit organic sales growth and mid-single-digit earnings growth. Investors have simply come to expect more of PepsiCo, and that means the shares could be industry laggards for longer.

Taking the glass-half-full point of view, however, could easily lead you to see 2025's outlook as more positive than it appears. After all, if low-single-digit organic sales growth and mid-single-digit earnings growth are what this company can achieve when it isn't hitting on all cylinders, imagine what it could do once it gets its business back on a stronger track.

Should you invest $1,000 in PepsiCo right now?

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Reuben Gregg Brewer has positions in PepsiCo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.