PepsiCo (PEP) investors went through a rough ride in 2024, with the beverage company’s shares sliding 12% over the year – a stark underperformance compared to the S&P 500’s (SPX) tremendous 25% rally. While somewhat justified by a mixture of industry-wide headwinds, a cautious consumer base, and operational challenges, I believe this decline has led to PEP stock trading at a discount. In the meantime, the company’s status as a Dividend King – a group of stocks that have raised dividends for over 50 consecutive years – makes it particularly intriguing for dividend growth investors. For these reasons, I remain bullish on PepsiCo stock.
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Why Did PepsiCo Stock Have a Rough 2024?
Before jumping into buying a stock that’s taken a big hit or lagged behind, it’s always a good idea to dig into why it dropped in the first place. Understanding the full story can help you figure out if it’s a short-term blip or something more serious. In this case, several challenges caused PepsiCo’s underwhelming 2024 performance. One such issue was sluggish demand in key markets, especially among lower-income U.S. consumers, which proved a significant headwind. Therefore, despite strong international growth (for example, sales in Africa, the Middle East, and South Asia were up 8% year-to-date), domestic demand struggled. A product recall particularly impacted the Quaker Foods N.A. division, which led to an 18% decline in organic sales.
Weather impacts also played a role. For instance, Gatorade volumes underperformed due to adverse seasonal conditions, although PepsiCo’s management did emphasize their efforts to achieve a rebound through targeted marketing. Inflationary pressures added complexity, particularly given the commodity costs, which, while stabilizing compared to previous years, still pressured margins. It’s quite likely that we will see the company raise prices once again to address these issues, which may end up having mixed effects on sales volumes.
Lastly, geopolitical tensions and cautious Chinese consumers weighed on international performance, even with PepsiCo posting revenue growth in the international divisions overall. While areas like Southeast Asia and Brazil posted strong growth, geopolitical and economic instability in regions like the Middle East and Western Europe dampened results. Chinese consumers remained alert about their spending year-to-date too. Together, these factors drove bearish investor sentiment around PepsiCo stock, contributing to its significant decline in 2024.
A Dividend King at an Appealing Yield
Despite the challenges mentioned earlier, I believe the recent drop in PepsiCo’s stock price has created an appealing opportunity for dividend growth investors, backing my bullish outlook on the name. Boasting 52 consecutive years of dividend increases, PepsiCo is a member of the elite group of stocks known as Dividend Kings. Historically, these stocks rarely experience prolonged selloffs, as income investors tend to capitalize on elevated dividend yields from quality names to secure rising income over the long term.
Today, PepsiCo’s dividend yield sits at 3.6%, which is among the highest in its history. This yield level was topped only during the Great Financial Crisis and the COVID-19 pandemic sell-offs. Accordingly, I believe this is one of those rare occasions where the stock once again presents an exceptional value proposition. Furthermore, given the predictable nature of the business, its robust cash flows and consistent earnings growth should support PepsiCo’s ability to continue to grow its dividend. For dividend-focused investors, combining a reliable income stream while securing an attractive entry yield makes a noteworthy case.
A Discounted Valuation for a Resilient Giant
Now, besides the argument that PepsiCo stock makes for an attractive dividend growth pick following its recent decline, it’s also worth noting that the company remains poised for record earnings in FY 2024. PepsiCo is expected to achieve an earnings per share (EPS) of $8.15, representing a 7% year-over-year increase. This estimate also implies that the stock is trading at just 18.8 times FY 2024’s EPS following its recent drop. This multiple then drops to 17.9 times on a next-12-month basis, with analysts seeing continued growth. These are some of the lowest valuation levels PepsiCo stock has traded at over the last decade.
One could argue that elevated interest rates explain this valuation compression, reflecting broader market trends for slow-growth consumer staples. That said, I see these multiples as undervaluing PepsiCo, given its strong moat, recession-proof product portfolio, and earnings growth prospects. This is especially true given that Wall Street forecasts single-digit annual EPS growth for the company beyond FY 2025, affirming PEP’s ability to sustain continued dividend increases for years to come.
Is PEP Stock a Buy, According to Analysts?
Wall Street analysts seem relatively optimistic about PepsiCo’s prospects following the stock’s underperformance. Specifically, PEP stock features a Moderate Buy consensus rating based on seven Buys and eight Hold recommendations over the past three months. At $184.80, the average PEP stock price target implies an upside potential of about 23.5% from the current levels.
For the best guidance on buying and selling PEP stock, look to Bank of America Securities’ (BAC) Bryan Spillane. He is the most accurate analyst covering the stock (on a one-year timeframe), boasting an average return of 1.42% per rating and a success rate of 57%.
Conclusion
PepsiCo’s tough 2024, illustrated in its lagging stock price against a booming equities market, appears to have created a unique opportunity for dividend growth investors. Despite the sluggish domestic demand, inflationary pressures, and geopolitical challenges, the company’s strong international growth and robust fundamentals as a consumer staples giant remain intact.
As a Dividend King with 52 consecutive years of increases and a 3.6% yield near historical highs, I believe PepsiCo is a reliable pick for those seeking gradually growing income while securing a compelling initial yield. Coupled with its discounted valuation and promising earnings outlook, it makes sense to be bullish on the stock in 2025.
