When a stock doesn't perform well, it's natural to ask whether you should buy, hold, or sell the shares. After all, it could present an opportunity, or the market might sense there are continuing challenges with the company.
PepsiCo's (NASDAQ: PEP) shareholders face such a decision. The share price has badly underperformed the market, falling 1.5% over the past year even as the S&P 500 gained 26.6% during this time span.
That makes this a good time to take a step back and analyze PepsiCo's prospects. It's the best way for investors with a long-term view to make an informed decision.
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A strong brand
PepsiCo offers a stable of popular beverages, snacks, and other food items such as soda, Gatorade, chips, cereal, and granola bars. It sells these items under well-established brands like Pepsi, Cheetos, and Quaker.
These familiar names draw consumer interest and remain popular. And you can find PepsiCo products at many places, including supermarkets, bars, restaurants, and sporting events.
Recent revenue growth has been sluggish, however. Its adjusted top line, which removes foreign currency translation effects, increased 1.9% in the latest quarter. This was driven by price increases, which added 5 percentage points, while weaker volume subtracted 3 percentage points. Broken out, convenient food volume dropped 2%, and beverages were flat.
However, this weak volume was likely primarily due to consumers stretched by higher prices. It's not just PepsiCo feeling the effects. Other companies, like McDonald's, also noted weaker consumer spending. With inflation abating, consumer brands should benefit. PepsiCo in particular, with its stable of products and brands that appeal to a wide audience, appears in a good position to see higher volume.
Importantly, management has kept an eye on expenses. PepsiCo's adjusted earnings per share increased 9% in the second quarter.
Attractive dividends
One of the stock's biggest attractions is the dividend, and shareholders can enjoy receiving payments while waiting for sales volume to pick up, which would likely boost the stock price. The shares have a 3.1% dividend yield, well above the S&P 500's 1.3%.
PepsiCo also has a long history of regularly increasing payments. The board of directors hiked the quarterly payout by 7% earlier this year, making it 52 straight years with an increase. Investors can take comfort in this fact, because it means that it has raised payments during all kinds of economic environments. It also makes the company a Dividend King, an elite group that have raised dividends for at least 50 straight years.
While that's an impressive history, shareholders shouldn't worry about future payouts. That's because its earnings support dividends. PepsiCo currently has a payout ratio of 73%.
The decision
The share price drop over the past year means that the stock trades at a better valuation, as measured by the price-to-earnings (P/E) ratio. Its P/E dropped to 26 from well over 30 a year ago. That's in line with the stock's 10-year median P/E, however. The S&P 500's P/E multiple has increased from 23 to 29 during this period.
Hence, the shares sell at a modest discount to the overall market. While the valuation doesn't suggest the shares have become attractive to value investors, those seeking dividends may find the stock appealing based on the dividend yield and commitment to increasing payment.
Hence, patient investors may wish to buy PepsiCo shares. That way, you can collect handsome dividend payments while waiting for sales growth to improve.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
