Should You Buy Dividend King Stock Pepsi Before October 8th?

Despite the sizable gains of the broader indices, 2024 was not a good year for PepsiCo (PEP -0.45%) investors. The share price is down slightly year to date, compared to a whopping 19% gain. Coca cola.

Pepsi will report its third-quarter earnings on Oct. 8 before the market opens. Here’s what investors need to know about the dividend stock to help them decide if it’s a buy now.

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Clearly defined expectations

Pepsi’s second-quarter earnings report included an update to full-year guidance. Pepsi now expects 4% organic revenue growth and 7% growth in basic earnings per share (EPS) to $8.15, compared to $7.62 in 2023. If Pepsi achieves this goal, it will have a price-to-earnings ratio (based on core EPS). ) of just 20.6 based on the current share price. Investors may wonder why the stock is so cheap.

There are several factors at play, but the simplest is that Pepsi has been hit particularly hard by declines in consumer spending, even compared to its peers. Pepsi is noteworthy because it is a global business and owns Frito-Lay and Quaker Foods. Its brand portfolio is highly diversified, which can be an advantage as it reduces reliance on a handful of brands that are doing well. But it can also be a disadvantage if some brands are not loyal to customers.

Until recently, Pepsi has done an excellent job of using price increases to offset higher inflationary costs. But it appears to have hit a new level of resistance, as evidenced by volume declines across all segments (especially Quaker).

Pepsi has offset some of those declines with cost cuts, but the business just isn’t firing on all cylinders right now. Pepsi’s July earnings call was filled with comments from management about cautious consumer spending behavior, weak demand and analyst concerns that Pepsi has raised prices too much in recent years, making its products relatively expensive compared to alternatives.

Investors should monitor management’s tone and comments on the state of the consumer on this upcoming earnings call, as well as any guidance updates. While Pepsi will benefit from lower interest rates, the effects of the interest cuts will likely take some time to affect its bottom line. Furthermore, lower interest rates won’t automatically help Pepsi, especially if they lead to higher inflation, a doubling of the Federal Reserve’s monetary policy, and a recession.

Capital allocation plans

Pepsi expects to return $8.2 billion to shareholders through $7.2 billion in dividends and $1 billion in buybacks.

In July, Pepsi raised its dividend 7% to $5.42 per share for the year, marking the 52nd consecutive year it has increased its dividend. Pepsi is in the elite category of Dividend Kings, which are companies that have increased their payouts for at least 50 years in a row.

Given the recent hike, Pepsi almost certainly won’t announce another dividend increase until at least next summer. But we could hear an update on its share buyback plans, especially given its recent acquisition.

On October 1, Pepsi announced the $1.2 billion acquisition of Siete Foods. The company makes tortillas, salsas, condiments, sauces, cookies, snacks and other foods and is known for its high-quality ingredients.

The acquisition shows Pepsi’s willingness to invest throughout the economic cycle, even during periods of slower growth. It may also indicate that Pepsi is trying to diversify its snack category with brands with pricing power and strong customer loyalty.

Speaking of high-quality brands, investors should also look to see if Pepsi provides an update on the energy drink maker Celsius (NASDAQ: CELH). Pepsi has a stake and distribution agreement with Celsius. But Celsius has struggled, and the stock price is now hovering around a 52-week low.

Just this past March, Celsius’ market cap hit an all-time high of over $21 billion. But just seven months later, its market cap is now just $7 billion. While Pepsi is unlikely to buy Celsius, investors should look for updates from Pepsi on the partnership and whether Pepsi may entertain increasing its stake or giving Celsius a cash infusion.

Ultimately, investors should see how Pepsi plans to manage its capital spending and capital return program next year, and whether it may favor mergers and acquisitions (M&A) over buybacks.

Pepsi is a balanced buy

Pepsi stands out as an excellent buy for patient investors. The business is not at the top of its game, but the valuation is compelling. Pepsi’s decision to raise its dividend by a hefty amount last July and buy Siete Foods shows its profitability even during downturns. By comparison, lower quality and less financially secure companies may have to hold off on buybacks, dividend increases, and mergers and acquisitions during a downturn.

Pepsi’s track record of dividend increases, along with its 3.2% yield, makes it a passive income powerhouse that investors can be confident in buying and holding for years to come.