Investors are about to learn a lot about PepsiCo's (PEP -0.62%) momentum heading into fiscal 2024. The snack and beverage giant will announce its Q4 results in early February, likely confirming that demand trends held up well through late December despite slower consumer spending in some parts of the economy.
Pepsi will also issue its first official 2024 forecast, along with a new outlook on its capital return plans. These updates could spark volatility for the stock around the Feb. 9 earnings report. But investors are better off ignoring that noise to focus on Pepsi's wider ambitions and opportunities for 2024 and beyond. Let's take a closer look.
Diverse growth
Pepsi entered the Q4 period with the wind at its back. Organic revenue was up 9% last quarter thanks to solid growth across the drink and snack portfolio. Each of Pepsi's product categories and geographic markets contributed to these gains, keeping the company on pace to increase sales by 10% this year on top of last year's 14% spike.
It wasn't all good news in the Q3 report, though. Pepsi's volume dipped in the food segment and was flat in its global beverage division. Coca-Cola, in contrast, reported a healthier mix between rising prices and increased sales volumes. For the stock to generate better returns, Pepsi will need to close that performance gap so that it doesn't have to rely solely on rising prices to boost organic sales.
Profits and cash returns
The outlook is more clearly positive around earnings, which are expanding at a solid clip these days. Profitability rose last quarter thanks to the combination of those increased prices and Pepsi's slowing cost inflation. These gains translated into a 16% earnings spike in Q3. Pepsi lifted its 2023 earnings forecast in response to that strong growth, and that's why most Wall Street pros are looking for profits to rise about 12% to $7.55 per share for the full year.
PEP Operating Margin (TTM) data by YCharts
Shareholder returns this year will be bolstered by direct cash. PepsiCo delivered an estimated $8 billion to investors through 2023, or about the same level as in the prior year. That includes $7 billion in dividends and $1 billion in share buybacks.
The February earnings report will include Pepsi's updated capital return outlook as well. Watch for the dividend to rise significantly given the company's strong expected earnings growth. Last year's boost was 10%, for context.
The price
The good news is that Pepsi stock is reasonably priced considering all of these positive factors. Shares are valued at 2.5 times annual sales, or less than half of Coca-Cola's premium. On the downside, it is far less profitable, and its growth isn't quite as robust. Yet you get a lot of value in owning this business, including diversified exposure to the packaged foods industry, a fast-growing dividend, and the potential for rebounding profitability over the coming years.
Investors who would prefer to watch this stock from the sidelines should follow operating profit margin for signs of a sustained uptick. That success would likely help Pepsi shares break out of their underperformance rut.
Yet, taking on a bit more risk here is likely to pay off over the long term. Pepsi has a great shot at accelerating sales and earnings growth over the next several years, starting with a modestly bullish 2024 outlook from the management team in early February.
