PepsiCo stock (NASDAQ:PEP) recently posted its Q4 and full-year results, showcasing continued strength. Along with this earnings release, the company also announced its 52nd consecutive annual dividend hike. The mix of solid results, an optimistic outlook going into Fiscal 2024, raised capital returns, and the fact that the stock keeps trading notably lower from its past highs convinced me to go dip buying following the company’s report. Thus, I am bullish on the stock.
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Iconic Brand Portfolio Drives Another Year of Strong Organic Growth
Taking a closer look at PepsiCo’s Q4 and full-year results, what instantly grabs my attention is the robust organic growth the company achieved, largely driven by its lineup of iconic brands. Household names like Pepsi, Lays, Tropicana, and Quaker, among others in PepsiCo’s portfolio, enjoy steady consumer demand, which allows the company to regularly raise prices without facing notable pushback.
With its portfolio mainly comprising snacks and soft drinks, PepsiCo emerges as a textbook example of a company enjoying inelastic demand.
In particular, PepsiCo’s revenues in FY2023 grew by 5.9% year-over-year to $91.5 billion. Revenue growth was driven by strong organic growth of 9.5%, partly offset by a 2% FX headwind. Organic growth was, in turn, primarily powered by higher prices (+13%), offset by a decline in volumes (-3%). Clearly, PepsiCo can implement notable price hikes on its products while facing minimal resistance in consumer demand.
It’s also worth noting that FY2023’s organic growth of 9.5% follows FY2022’s organic growth of 14.4% and brings PepsiCo’s three-year compound annual organic revenue growth rate to 11%. I am mentioning this to highlight Pepsi’s pricing power. Of course, at some point, consumers may express dissatisfaction and consider exploring alternatives. Still, as long as PepsiCo sees a consistent willingness among consumers to pay higher prices, shareholders should be satisfied that the company keeps exploiting this lever.
Meanwhile, PepsiCo’s management team is optimistic about the company’s organic growth trajectory into 2024, as reflected in their guidance for the year. Specifically, they project a minimum organic growth rate of 4%, signaling another period marked by at least mid-single-digits revenue expansion. In my view, there is potential for an even better organic growth number due to the positive shift in foreign exchange dynamics this year, in contrast to FY2023, which is expected to bolster the company’s financial standing.
PepsiCo’s tendency to provide conservative guidance also suggests that actual performance figures could significantly surpass initial expectations. Evidently, in the same period last year, management originally projected a 6% organic growth rate for FY2023, but the actual figure ultimately exceeded expectations by a wide margin, reaching 9.5%, as I mentioned earlier.
The Dividend, Buybacks, and the Valuation
Besides strong organic revenue growth, PepsiCo’s most recent report showcased exceptional profitability, which, in turn, allowed management to raise its dividend and execute accretive buybacks once again.
For FY2023, PepsiCo’s core (adjusted for one-off items) gross margin expanded by 101 basis points. Thus, adjusted operating margins also comfortably expanded by 90 basis points. The blend of higher sales and a strong margin expansion led to core EPS growth of 14%, with buybacks also playing a role in this result.
Seeing PepsiCo, one of the most mature global conglomerates, posting double-digit EPS growth is quite remarkable. Thus, it’s no wonder that management once again felt comfortable increasing the dividend, this time by 7.1% to an annual rate of $5.42. A testament to its business model’s resilience and its brands’ ability to perform stably throughout multiple decades, this marked its 52nd successive annual dividend increase.
Management also said they are targeting $1 billion in buybacks in 2024. Given that PepsiCo stock is now trading at a forward P/E of about 20.4x, which is on the low end of its past five-year range (20x-27x), ongoing repurchases should be more accretive to EPS than usual.
Overall, PepsiCo’s below-average valuation, which has resulted from growing earnings in the face of a declining share price in recent months, makes for a good enough reason for me to go dip buying. Its optimistic, forward-looking outlook and commitment to capital returns further strengthen my confidence in the stock.
Is PEP Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, PepsiCo has a Moderate Buy consensus rating based on nine Buys and seven Holds assigned in the past three months. At $189.44, the average PepsiCo stock forecast suggests 12.2% upside potential.
The Takeaway
To close, PepsiCo’s most recent results underscore its resilience and sustained growth prospects. The icing on the cake was the 52nd successive annual dividend hike, which reminded us of PepsiCo’s commitment to rewarding shareholders.
Moving forward, the outlook for 2024 seems optimistic, which, combined with continued capital returns and the stock trading at a below-average valuation, has convinced me to gradually build a long position in the company.
