PepsiCo Stock: Buy, Sell or Hold?

Consumer facing companies such as PepsiCo (PEP 0.46%) are popular with investors because they sell products that people use regularly and have simple business models that are easy to understand for investors of all experience levels. In PepsiCo’s case, simple is profitable. The stock has outperformed the broader market since the late 1980s.

However, the stock’s performance lagged behind S&P 500 over the last 12 months, five years and 10 years. Has PepsiCo lost its magic or is the stock about to make a comeback?

Let’s look at the arguments for whether investors should buy, sell or hold PepsiCo stock today.

Growth has dominated value for most of the past five years

Many refer to PepsiCo as a value stock. Value stocks are generally mature companies that pay dividends and aren’t growing as much as they used to. Stock market dynamics may explain why PepsiCo hasn’t performed as well as the S&P 500 in recent years.

Below, you can see how the S&P 500 has outperformed PepsiCo stock in two distinct time frames over the past five years. First, there was 2020-2022, when the Federal Reserve kept interest rates at zero to stimulate the economy during COVID-19. Interest rates near zero percent favor growth stocks because money is more freely available and companies can borrow cheaply.

PEP Total Return Price data by YCharts.

As you probably know, this caused a market bubble in riskier assets such as growth stocks and cryptocurrencies and led to skyrocketing inflation. The Federal Reserve raised rates to combat this. Then artificial intelligence (AI) emerged as an investment trend in early 2023. Once again, investors flocked to tech stocks over companies like PepsiCo for AI to drive. The performance of the “Magnificent Seven” stocks played a role in the S&P 500’s rise, leaving a company like PepsiCo behind.

The stock market cycles between growth and value over time, which is why one investment strategy doesn’t always perform better than another. At some point, the pendulum will swing back and value stocks like PepsiCo will shine again. This is important because one might look at the performance of PepsiCo’s stock going back the past few years and assume that something must be wrong with the company itself.

PepsiCo is still a great business today

However, a look at PepsiCo’s fundamentals clearly shows a healthy business. The company dominates the aisles of your local store. Most people know PepsiCo for its iconic soda brand, but it owns more than 500 product brands, including beverages and snacks. Its notable brands include Lay’s, Aquafina, Gatorade, Mountain Dew, Quaker, Cheetos, Doritos, Tostitos and more. People eat and drink regardless of the economy, and PepsiCo’s strong brand strength has helped the company maintain profits despite competition from generics and other name brands.

Do you want proof? Look no further than PepsiCo’s legendary dividend history. It has paid and increased its dividends for 52 consecutive years, a streak that has spanned recessions, a pandemic and every other adversity over the past five decades. Importantly, PepsiCo has been able to raise its dividend further as it continues to grow its earnings per share. The company will pay $5.42 per share this year, while analysts expect PepsiCo to earn $8.15 per share. That’s only 66% of his earnings.

The company acknowledged last quarter that some consumers are struggling financially and cutting back on some of their grocery purchases. Still, PepsiCo’s outlook remains bright. Analysts believe the company will grow earnings by an average of 7% annually over the next three to five years. That’s enough growth to continue raising the dividend, and the share price should follow suit.

Should investors buy, sell or hold PepsiCo?

PepsiCo’s growth is solid, but not enough that you can pay any price for the stock and expect to make money.

Fortunately, the market’s tilt toward growth stocks has left PepsiCo stock at a fair valuation for long-term investors.

PEP PE report data by YCharts.

PepsiCo has traded at an average price-to-earnings (P/E) ratio of nearly 26 over the past decade. You could argue that’s a bit steep for a company that’s been growing earnings at a high single-digit rate, but investors appreciate the company’s reliability. The stock’s current P/E of 21 represents a discount to the average and an opportunity for those who might have been hesitant to pay what the stock has commanded in years past.

I would hesitate to call PepsiCo a bargain today. Still, a fairly valued stock means shareholders can reasonably expect PepsiCo’s investment returns to match its growth. Assuming PepsiCo grows earnings by 7% annually, the 3% dividend yield should push annualized yields to around 10%. This won’t knock your socks off, but it’s enough to generate life-changing wealth when compounded over decades. Not many companies have the longevity to produce like this. PepsiCo can, which makes the stock a solid buy today.