Since hitting an all-time high last November, the Nasdaq Composite has plunged as much as 20% in value and is currently down about 17.1%. Several popular stocks in the index have fallen even further, but some Nasdaq-traded stocks have not been hit nearly as hard.
For instance, consumer staples giant PepsiCo (PEP -0.24%) is trading down only about 9.9% from its peak $177 share price reached in January. The recent correction in PepsiCo's stock seems to be a temporary issue related to its most recent earnings report and actually just created a buying opportunity for some investors. The price drop is one rather obvious reason to buy this value stock, but there are at least three other reasons to consider. Let's dive into the stock's fundamentals and valuation and find out why PepsiCo is a buy right now.
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1. PepsiCo has brand power and it flexed it in 2021
PepsiCo reported its earnings for the fiscal year ended 2021 in mid-February, and the earnings results for the year were arguably very positive for shareholders.
PepsiCo produced $79.5 billion in net revenue in 2021, equivalent to a 12.9% growth rate. So how did the $220 billion (by market capitalization) snack and beverage company pull off double-digit net sales growth last year?
The answer lies within PepsiCo's leading portfolio of brands, including the eponymous Pepsi, Lay's, Gatorade, Mountain Dew, SodaStream, and Quaker Oats, that each generates $1 billion-plus in annual revenue. As a result of these leading brands, PepsiCo's products are consumed more than 1 billion times every day by people in over 200 countries and territories throughout the world.
PepsiCo recorded a 2.5% increase in its convenient food volumes in 2021, while the company posted an even better 10% bump in beverage volumes. The company's total organic volumes were 4% higher in 2021 than the year-ago period. And the effective 5% net price hikes that PepsiCo passed along to consumers were another piece of how the company logged double-digit net revenue growth in 2021. PepsiCo's acquisitions of Pioneer Foods and Be & Cheery chipped in another 2% to net revenue growth, and favorable currency translations were responsible for the remaining 1% of net sales growth.
PepsiCo's non-GAAP (adjusted or core) diluted earnings per share (EPS) surged 13.4% higher to $6.26 in 2021. How did the company accomplish this? Two factors led to this earnings growth. Aside from PepsiCo's higher net revenue base, the company's non-GAAP net margin edged a single basis point higher to just over 10.9% in 2021. The other reason for the company's earnings growth was a 0.2% reduction in PepsiCo's weighted average outstanding share count to 1.39 billion, which was due to share buybacks executed during the year.
Analysts anticipate that PepsiCo's momentum will continue but to a lesser extent in the medium term. This is reflected by the fact that analysts are forecasting 8% annual core EPS growth over the next five years.
2. PepsiCo will soon qualify as a Dividend King
PepsiCo had a strong showing in 2021 and has an encouraging outlook for the foreseeable future. That makes it clear why the company's board of directors announced a 7% raise in the annualized dividend per share to $4.60. The dividend increase will begin with the quarterly dividend that is expected to be paid in June. Once paid, this will mark the stock's 50th consecutive year of dividend raises, which will make it a Dividend King.
PepsiCo's dividend payout ratio of 67% for 2021 is only a tad high, but still quite manageable. That's why dividend growth will probably slightly lag earnings growth over the next several years. But even so, I believe the company can keep handing out 7% annual dividend increases to get that payout ratio just below 65% by the end of 2026.
Along with PepsiCo's market-beating 2.9% dividend yield, this is an enticing blend of yield and growth prospects.
3. The stock is reasonably valued
The third reason to consider buying PepsiCo is that the inflation-proof stock looks to be sensibly priced.
PepsiCo is trading at a forward price-to-earnings ratio of 21.9, slightly below the nonalcoholic beverages industry average of 22.7. Even considering that PepsiCo's 8% annual earnings growth potential is a bit lower than the industry average of 9%, the steady nature of the stock arguably deserves a premium. PepsiCo's trailing-12 months dividend yield of 2.7% is also essentially in line with the 13-year median of 2.8%, which is further confirmation that the stock is a buy for dividend growth investors.
