Where will PepsiCo’s stock be in 3 years?

PepsiCo (PEP 0.30%) it has been a poor investment for the past three years. Its shares rose just 9% and delivered a total return of 19% after including reinvested dividends. In comparison, the S&P 500 generated a total return of 31%.

PepsiCo underperformed the market as inflation, a strong dollar and several major pullbacks halted its growth. However, its attractive forward dividend yield of 3.1% and its reputation as a safe stock have kept it from falling off a cliff. Should investors still buy PepsiCo in anticipation of higher earnings over the next three years?

Image source: Getty Images.

What happened in the last three years?

PepsiCo is one of the largest beverage and packaged food companies in the world. Its beverage division sells the eponymous soda, other carbonated beverages and a wide variety of fruit juices, teas, bottled water and sports drinks. It sells packaged foods through its Frito-Lay, Quaker Foods and Pioneer Foods divisions.

In 2023, PepsiCo’s net and organic revenue growth slowed. Inflation has forced it to raise prices and shrink its packages, and it has faced slower spending in China and Latin America. Several safety-related recalls — including a major one caused by a salmonella outbreak at Quaker Foods — exacerbated its slowdown.

Its EPS growth accelerated on a constant currency basis in 2023, but the strong dollar offset most of those gains. As a result, reported EPS increased by just 2%.

Data source: PepsiCo. EPS = earnings per share.

For 2024, PepsiCo expects its organic revenue to grow about 4% as its constant-currency core EPS grows “at least” 8%. On the second-quarter conference call, CEO Ramon Laguarta said he was addressing his safety and supply chain issues at Quaker and that the company was still “feeling good in the second half of the year.”

What will happen to PepsiCo in the next three years?

PepsiCo plans to gradually lower its prices again as inflation eases. Laguarta expects its business to gain more “momentum” in 2025 as it overcomes its pullbacks, the macro environment warms and it launches new marketing campaigns. It also plans to step up its investment in new products for China and Latin America.

From 2023 to 2026, analysts expect PepsiCo’s reported revenue to grow at a compound annual growth rate (CAGR) of 4% as reported EPS grows at a CAGR of 12%. Its shares still look reasonably valued at 22 times this year’s earnings. Coca cola (K.O -0.34%)which sells only drinks and is growing at a faster pace, trades at 27 times this year’s earnings.

PepsiCo and Coca-Cola are both dividend kings that have raised their dividends for at least 50 consecutive years. PepsiCo has increased its dividend for 52 consecutive years, while Coca-Cola has increased its payout for 62 consecutive years. Both companies should continue to raise these dividends over the next three years.

Assuming PepsiCo continues to trade at 22 times earnings, meets Wall Street expectations and grows its EPS another 12% in 2027, its stock could rise more than 30% to around $230 over the next three years. That would represent an acceleration of its tepid returns of the past three years, but would not guarantee it beats the S&P 500 — which has averaged an annual gain of 10% over the past two decades.

Is PepsiCo the right stock to buy now?

PepsiCo is a good place to park your money and earn some dividends. Its business is well diversified, generates stable growth and is reasonably valued. However, Coca-Cola still offers a better mix of value, growth and earnings than PepsiCo, while a simple S&P 500 index fund could generate higher gains over the next three years.

Income investors can also get higher risk-free returns from CDs and government bonds. Therefore, PepsiCo is not a stock I would rush to buy in this volatile market.