Investing in large-cap stocks is often an ideal investment strategy. Generally, large-cap companies are defined as those with a market cap of more than $10 billion. Due to their massive size, these companies enjoy wide competitive moats, pricing power, and stable cash flows. Hence, the best large-cap stocks have the potential to outpace the broader markets and deliver game-changing returns to shareholders over time. Two large-cap stocks to watch now are Pepsi (NASDAQ:PEP) and Starbucks (NASDAQ:SBUX).
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I am bullish on both these companies due to their growing earnings, consistent dividend hikes, and recession-resistant businesses. See how the two companies compare using TipRanks’ comparison tool below.
Pepsi Is Well-Diversified
Valued at $232.5 billion, Pepsi is among the most recognizable brands in the world. Pepsi owns and operates a diversified business that includes beverages, snacks, and food. It also has operations in several countries, providing investors with regional or geographic diversification.
Pepsi owns brands such as Tropicana, Lays, Fritos, and Cheetos. Moreover, the company provides insights into these segments, as it breaks out quarterly numbers for businesses such as Frito-Lay (snacking) and Quaker Oats (food items). In 2023, these two segments accounted for 31% of total revenue and 60% of its operating profit.
Pepsi expects its international business to be a key driver of top-line growth in the upcoming decade. In 2023, its international sales surged over $40 billion, allowing Pepsi to benefit from economies of scale and higher margins in these markets.
Pepsi’s Dividend Is Growing
Pepsi stock has almost tripled in the last decade and yet offers shareholders a tasty dividend yield of nearly 3%. It currently pays shareholders a quarterly dividend of $1.265 per share, and these payouts have risen by almost 11% annually in the last two decades.
Pepsi has raised dividends for 52 consecutive years, which is remarkable and showcases the predictable nature of the company’s cash flow. Similar to other fast-moving goods companies, Pepsi is fairly recession-resistant and thrives across business cycles.
Pepsi increased its free cash flow by 39% to $8.1 billion in 2023, and it paid $6.6 billion to shareholders via dividends, indicating a payout ratio of 81.5%. While the payout ratio might seem high, Pepsi still has the flexibility to target accretive acquisitions and strengthen its balance sheet, driving future cash flows and dividends higher.
The company grew its sales by 10% and earnings by 14% year-over-year in 2023. In 2024, it expects sales to rise by 4% while earnings growth is forecast at 8%. Priced at 20.8x forward earnings, PEP stock trades at a premium, given the valuation for peers is lower at 17.6x. Still, Pepsi’s brand value, widening portfolio of products, and growing earnings base allow it to command a high valuation.
What Is the Target Price for PEP Stock?
Out of the 17 analyst ratings given to PEP stock, 11 are Buys, six are Holds, and none are Sells, indicating a Moderate Buy consensus rating. The average PEP stock price target is $190.65, indicating upside potential of 12.45% from current levels.
Starbucks Has Delivered Strong Returns
Another global brand, Starbucks, has returned more than 1,000% to shareholders in the last 20 years, easily outpacing the broader market in this period. Despite its outperformance, Starbucks offers shareholders a dividend yield of more than 2.6%, as it trades close to 52-week lows.
Starbucks’ brand proposition gives it an economic moat in terms of pricing power, allowing the coffee giant to offset headwinds such as inflation. In the last five decades, Starbucks has opened close to 39,000 stores. However, its growth story is far from over, as the company plans to open 55,000 stores by the end of this decade.
Its ongoing expansion should help Starbucks boost its earnings and drive dividends higher, something it has done for 13 consecutive years. Starbucks pays shareholders an annual dividend of $2.28 per share, and these payouts have more than tripled in the last nine years.
Armed with a loyal customer base of 34 million members, Starbucks ended the recent quarter with a return on invested capital (ROIC) of 63%. This shows that Starbucks is resourceful in using its capital to expand in the U.S. and other international markets.
What Is the Target Price for SBUX Stock?
Out of the 25 analyst ratings given to SBUX stock, 10 are Buys, 15 are Holds, and none are Sells, indicating a Moderate Buy consensus rating. The average SBUX stock price target is $107.30, indicating upside potential of 23.1% from current levels.
Wall Street expects Starbucks to grow its earnings from $3.54 per share in Fiscal 2023 (ended in September) to $4.05 per share in Fiscal 2024 and $4.71 per share in Fiscal 2025. So, SBUX stock is priced at around 22x forward earnings, which might seem expensive given that the industry average is lower at 15.8x. However, SBUX is forecast to grow the bottom line at a far higher pace. Therefore, it warrants a lofty valuation.
The Takeaway
Pepsi and Starbucks are both growing at a steady rate and might not deliver market-beating returns each year. However, they should help shareholders outpace inflation and benefit from higher dividends in the upcoming decade, which enhances the yield-at-cost significantly.
