Elevated inflation and the possibility of a looming recession have led the Nasdaq Composite to plunge 23% year to date. But stocks that are seen as lower risk have fared much better so far this year.
For instance, the mega-cap food and beverage stock PepsiCo (PEP 3.62%) has fallen less than 1% year to date. Regardless of whether the economy enters into a recession, PepsiCo looks like a buy. Here are three reasons why.
1. A track record of trouncing analyst forecasts
In late April, PepsiCo reported first-quarter results for the period ended March 19. The company's net revenue and non-GAAP (core or adjusted) diluted earnings per share (EPS) both exceeded the analyst consensus.
PepsiCo produced $16.2 billion in net revenue in the first quarter, representing a 9.3% growth rate over the year-ago period. For context, this easily topped the average analyst estimate of $15.5 billion in net revenue for the quarter. How did PepsiCo beat the analyst net revenue consensus for the 10th quarter out of the past 10 quarters?
PepsiCo's extensive portfolio of billion-dollar brands like Pepsi, Lay's, and Gatorade are mostly consumed at home, which makes the company especially resilient in recessionary times. The company generated 3% volume growth in its convenient foods segment and 6% volume growth in its beverages segment. Along with the price hikes that it passed on to consumers during the quarter, this explains PepsiCo's respectable net revenue growth in the first quarter.
The company recorded $1.29 in core EPS during the quarter, which equates to a 6.6% year-over-year growth rate. This surpassed the average analyst prediction of $1.24 for the quarter. And it was the 10th quarter out of the last 10 that PepsiCo matched or bested the analyst earnings consensus.
Aside from the company's higher net revenue base, this earnings growth was affected by two factors. First, PepsiCo's non-GAAP net margin declined 30 basis points over the year-ago period to 11.1% in the first quarter. This was the result of cost inflation. Second, the company's weighted-average outstanding share count rose 0.3% year over year to 1.4 billion shares during the quarter.
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This is why PepsiCo's core EPS growth lagged net revenue growth in the first quarter. But as cost pressures gradually fade, analysts expect that the company's earnings growth will accelerate from the rate posted in the first quarter. That's why analysts anticipate that PepsiCo's core EPS will compound at 7.5% annually over the next five years.
2. The dividend will keep growing
Once PepsiCo's $1.15 quarterly dividend is paid at the end of June, the stock will officially become a Dividend King. And that 50-year dividend growth streak looks poised to continue for many more years.
That's because PepsiCo's dividend payout ratio is expected to be 67% in 2022. This means that the company is retaining one-third of its earnings to reinvest in its business, execute share repurchases, and pay down debt. This should allow PepsiCo to deliver plenty more 6% to 7% annual dividend increases in the years ahead.
Given that the stock's 2.7% dividend yield is nearly double the S&P 500 index's 1.5%, this is an intriguing mix of income and growth.
3. A reasonable valuation for a blue-chip stock
Based on PepsiCo's current valuation, the market seems to be giving the stock the recognition that it deserves. Its forward price-to-earnings (P/E) ratio of 26 is meaningfully higher than the S&P 500 consumer staples sector forward P/E ratio of 20.
However, PepsiCo will join the select few consumer staples and consumer defensive stocks that are Dividend Kings in a matter of weeks. This demonstrates that the stock is among the best in the world, which arguably justifies its lofty premium.
