Many growth stocks crumbled this year as inflation, rising interest rates, and other macro headwinds drove investors toward more conservative investments. The S&P 500 officially entered a bear market last month, and it could continue to stagnate for at least a few more quarters.
Bear markets are historically the best time to buy stocks, but the volatility often prevents nervous investors from pulling the trigger. However, there are still plenty of defensive blue-chip stocks that hold up well during bear markets and generate reliable returns throughout the subsequent bull markets.
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One evergreen stock that fits that profile is PepsiCo (PEP -2.97%), the diversified beverage and packaged foods maker. It has generated a market-beating total return of 560% over the past 20 years. Let's review PepsiCo's core strengths to understand why it's still a great addition to your portfolio as the growling bear chomps down on the market's weaker stocks.
A diversified business model
PepsiCo is often compared to Coca-Cola (KO 0.15%), but the two companies are fundamentally different. Unlike Coca-Cola, which only sells beverages, PepsiCo sells a diverse mix of drinks (including its namesake soda, Mountain Dew, Gatorade, Aquafina, and additional licensed brands), as well as a wide range of packaged food products through its Frito-Lay, Quaker, and Pioneer Foods subsidiaries.
This diversified business model insulates PepsiCo from declining soda consumption rates and makes it a recession-resistant investment, because shoppers will continue to buy its products throughout economic downturns. Under Indra Nooyi, who served as PepsiCo's CEO from 2006 to 2018, it also refreshed many of its brands with new flavors and healthier versions, which helped it partially overcome its reputation as a junk food giant.
Steady, long-term growth
Between 2001 and 2021, PepsiCo's annual revenue increased at a steady compound annual growth rate (CAGR) of 11%. Its diluted earnings per share (EPS) increased at a CAGR of 14%. PepsiCo has divested some of its weaker brands and acquired new ones over the years, but its organic sales and core EPS -- which exclude those deals -- have remained remarkably consistent.
|
Metric |
2017 |
2018 |
2019 |
2020 |
2021 |
|---|---|---|---|---|---|
|
Organic sales growth |
2.3% |
3.7% |
4.5% |
4.3% |
9.5% |
|
Core EPS growth* |
9% |
9% |
1% |
2% |
12% |
Data source: PepsiCo. *Constant currency basis.
In the first half of fiscal 2022, PepsiCo's organic sales rose 13.3% as its core EPS increased 9% on a constant currency basis. For the full year, it expects organic sales to improve 10% and core EPS to grow 8%.
In comparison, Coca-Cola projects its organic sales will rise 7%-8% this year, with comparable EPS increasing 5%-6%.
An inflation-resistant business model
As a packaged foods maker, PepsiCo isn't immune to inflation. However, it's been offsetting those higher costs by reining in its spending and raising its prices. That's why its operating margin still expanded significantly in the first half of fiscal 2022 even as its gross margin contracted.
|
Metric |
1H 2021 |
1H 2022 |
|---|---|---|
|
Gross margin |
54.3% |
53.7% |
|
Operating margin |
16% |
20.2% |
Data source: PepsiCo.
For the full year, analysts expect PepsiCo's operating margin to rise 10 basis points to 14.5%. The bears might argue that PepsiCo will eventually run out room to cut costs or raise prices, but this company has endured plenty of inflationary cycles and recessions since its public debut in 1919.
Consistent shareholder returns
PepsiCo's evergreen business model enables it to generate plenty of cash for buybacks and dividends. Over the past 20 years, it reduced its share count by more than 20%. It also recently raised its dividend for the 50th consecutive year, which makes it a new Dividend King of the S&P 500.
Today, PepsiCo pays an attractive forward dividend yield of 2.7%. That's just slightly lower than Coca-Cola's forward yield of 2.8%, but should make it an appealing safe-haven stock for income investors.
A reasonable valuation
PepsiCo's stock has advanced more than 10% over the past 12 months as investors rotated toward defensive blue chips, but it still trades at a reasonable 26 times forward earnings. PepsiCo isn't a screaming bargain like some of the market's deeper value plays, but it should continue to command a higher multiple as long as the bear market drags on.
