Is This Dividend King a Good Stock to Buy Now?

With a market capitalization of $241.8 billion, PepsiCo (PEP) has established itself as a global leader in the food and beverage industry through iconic brands such as Pepsi, Mountain Dew, Gatorade, Lay's, and Quaker. It is known for its business stability, reliable and steady dividends, and long-term growth prospects.

The company operates in over 200 countries. One of PepsiCo's most appealing qualities as an investment is its commitment to returning value to shareholders. PepsiCo is a Dividend King, having raised its dividend for 52 consecutive years, demonstrating its operational resilience over the last few decades. This title is given to companies that have consistently increased their dividends for over 50 years.

PepsiCo's recent third-quarter results showed consistent demand for its products, despite high competition and disruptions in some of its business segments caused by geopolitical tensions. PEP stock has gained 2.7% year-to-date, compared to the S&P 500 Index’s ($SPX)gain of 22.5%. Let’s dig into Pepsi's quarterly results.

PepsiCo's Q3 Earnings Showed Resilience

Net revenue in the third quarter of 2024 fell short of consensus estimates, but increased by 1.3% year on year to $23.3 billion. Adjusted core earnings per share (EPS) increased by 5% to $2.31. EPS also exceeded the consensus estimate by $0.02 per share. 

PepsiCo's ability to consistently increase earnings has enabled it to return capital to shareholders in the form of dividends. The company increased its dividend by 7% to $1.355 per share. The company pays a forward dividend yield of 3.08%, higher than the average of 1.89% among the consumer staples sector. 

For the first nine months of 2024, PepsiCo generated an adjusted free cash flow of $3.5 billion. This FCF balance should allow the company to pay out $7.2 billion in dividends and $1.0 billion in share repurchases for the entire year, as originally planned.

Generating positive free cash flow should allow the company to maintain its forward dividend payout ratio of 62.7%. Its payout ratio (the portion of earnings distributed as dividends) remains healthy, implying that the dividend is sustainable, even in uncertain market conditions.

Prior to the quarterly results, PepsiCo announced its intention to acquire Siete Foods. The $1.2 billion deal is expected to strengthen the company's food portfolio with its authentic Mexican-American brand.

Pepsi CEO Ramon Laguarta stated, “For the balance of the year, we will continue to invest in commercial activities and brand support to stimulate consumer demand. Our investments will be enabled by elevating and advancing productivity initiatives across our entire organization.” 

For the full year, the company anticipates 4% organic revenue growth and an 8% increase in adjusted core EPS. 

Despite fierce competition from consumer favorite companies, such as The Coca-Cola Company (KO) and Nestle (NSRGY), PepsiCo has maintained its global reputation. Its strong brand equity, diverse product portfolio, and global expansion have enabled it to gain a competitive advantage and increase dividends. 

Analysts expect PEP's earnings to increase by 7.04% in 2024 and 6.08% in 2025. Trading at 21x forward 2024 earnings, the stock is a reasonable buy now, and trades at a discount to its five-year historical average P/E multiple of 25.3x. 

What Does Wall Street Say About PepsiCo Stock?

Analysts believe PepsiCo stock is a good long-term investment, especially for conservative investors looking for dividend stability and modest capital appreciation. Currently, the stock has a "moderate buy" rating on Wall Street. Eight of the 20 analysts who cover PEP have a "strong buy" rating, 10 have a "hold" rating, and one has a "strong sell."

Following the Q3 results, DBS analyst Zheng Feng Chee maintained a "buy" rating on PEP stock with a $200 target price. The analyst believes the company is on track for growth in the second half of 2024, "driven by improvements in key business segments and geographical areas." 

Furthermore, he believes PepsiCo's targeted investments in international markets, as well as its acquisition of Siete Foods, may position the company for stronger long-term growth. Barclays also maintained a “buy” rating, with a price target of $186.00.

Based on its mean target price of $183.39, PEP stock has upside potential of 5.1% from current levels. Plus, its high target price of $202 implies an upside potential of 15.8% over the next 12 months. 

The Bottom Line on This Consumer King

PepsiCo stock offers a balanced mix of income and growth potential. Although PEP stock lacks the potential of hyper-growth stocks, its strong brand portfolio, resilient business model, and commitment to shareholder returns make it a solid choice for long-term income investors.

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On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.