When searching for new stocks to invest in, dividend investors usually try to find a good compromise between income, income stability, and growth potential. There’s no perfect investment that scores high on all three at once, so trade-offs have to be made. Right now, PepsiCo (NASDAQ: PEP) looks like it is offering investors a good combination of positives because it is facing some near-term negatives that seem likely to be temporary headwinds.
Here’s why buying PepsiCo today could help to set you up for a lifetime of reliable dividends.
Given the company’s name, PepsiCo often gets looked at as a beverage company. This isn’t wrong, as it does produce a broad range of beverages along with its namesake brand. However, the company is far more diversified, producing and marketing snacks and packaged food products as well. In fact, the consumer staples giant’s snack business is probably more exciting than its beverage business, given that PepsiCo is the No. 2 player in non-alcoholic beverages but the No. 1 player in salty snacks with its Frito-Lay business.
And while the packaged food operation isn’t near the top of the pack, PepsiCo’s Quaker Oats division has some serious name recognition. All in, PepsiCo is a huge force within the consumer staples sector with a diversified portfolio of products that are truly differentiated. It is pretty close to a one-stop shop in the food space.
Its industry-leading position, meanwhile, is protected by its size and scale. PepsiCo has a distribution network and marketing team that are hard to compete with. Given its size and financial strength, it can act as an industry consolidator, noting that it just recently bought a Mexican-American food brand called Siete. This type of acquisition can quickly add to PepsiCo’s growth because the smaller business gets plugged into PepsiCo’s distribution network and benefits from increased advertising.
So, from a big-picture perspective, PepsiCo is the kind of company that allows investors to benefit from its strong potential for long-term business growth. That, however, is only half the story since buying a good company at too high a price can turn it into a bad investment.
PepsiCo’s recent performance, coupled with tough industry dynamics, has pushed the shares into value territory. The 3.6% dividend yield is near all-time highs, and the price-to-sales, price-to-earnings, and price-to-book value ratios are all below their five-year averages. PepsiCo stock looks like it has been put on the sales rack.
Why is PepsiCo so cheap today? The company’s financial performance has cooled after a strong run following the coronavirus pandemic. There are concerns that new weight loss drugs will hurt demand. And it seems as though regulators are turning in a more health-conscious direction. These are all legitimate issues to consider, but bear in mind that PepsiCo has increased its dividend annually for more than five decades, making it a Dividend King. You don’t build a record like that by accident; it requires a strong and resilient business. Or, to put that more succinctly, PepsiCo has muddled through hard times before, and if history is any guide, it will likely do so again this time around, too.
If you buy PepsiCo stock today, you are getting a stock that has fallen about 20% from its all-time highs. That means it has a historically high yield and a historically cheap valuation. And yet it is backed by a very strong business.
Dividend investors looking to be set up with a lifetime of strong dividends should be very interested. So, too, should dividend growth investors, given the track record of annual dividend increases. Growth-at-a-reasonable-price investors should also find the stock appealing, considering the valuation. If you think in decades and not days, PepsiCo appears to be a great long-term investment opportunity today. It is the kind of stock you buy and hold onto for the rest of your life.
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*Stock Advisor returns as of February 3, 2025
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.
Could Buying PepsiCo Stock Today Set You Up for Life? was originally published by The Motley Fool
