With trailing-12-month revenue of nearly $92 billion, PepsiCo (PEP -0.62%) is one of the biggest and most important food and beverage companies in the world. But surprisingly, most people don't realize just how big its portfolio of brands really is.
When people think of Pepsi, they think of its portfolio of carbonated soft drinks. Its portfolio includes well-known names such as Pepsi, Mug Root Beer, Mountain Dew, Crush, and more. And indeed, this is the biggest part of its business, with beverage sales in North America accounting for 31% of its total net sales.
However, nearly 50% of Pepsi's operating income (through the first three quarters of 2023) came from its Frito-Lay division in North America. This segment owns well-known potato and corn chip brands such as Fritos, Lays, Doritos, and Ruffles.
Beyond this, Pepsi also owns Quaker Foods, maker of oatmeals, cereals, snacks, and more.
Finally, Pepsi sells its drinks, snacks, and foods both in the U.S. and internationally.
Investors who dropped $1,000 into the stock five years ago have more than $1,500 today, or nearly $1,800 if they reinvested dividends along the way. That's not bad at all. But unfortunately, that's less than investors would have had if they had just invested in the S&P 500 index.
That's right -- PepsiCo stock has underperformed the market over the last five years. Here's why, and also what investors can expect over the next five years.
Why Pepsi stock is losing
Pepsi stock has underperformed the market simply because its business hasn't grown enough to support a market-beating stock performance. That's how the stock market generally works -- business growth translates to stock-price appreciation over extended time periods.
Pepsi is growing. The company keeps finding ways to grow both organically and through acquisitions. Moreover, management is always looking to improve operations to squeeze out higher profitability.
However, as the chart below shows, Pepsi stock has gone up at a faster pace than its business has grown. And that's a tough situation for investors hoping for market-beating results.
Can Pepsi return to winning?
For investors looking for a strong business with predictable dividends, Pepsi could absolutely be a stock worth owning. The company increases its revenue most years. And it's paid and increased its dividend for 51 consecutive years, making it one of the few Dividend Kings out there.
Investors need to be aware that the dividend is central to the capital-allocation strategy of PepsiCo's management. This is a good thing, because investors can rely on Pepsi to pay a growing dividend without fail. Income investors appreciate the consistency. However, at this point, almost all of the company's earnings are used to pay dividends, as seen in the chart below.
PEP EPS Diluted (TTM) data by YCharts
In other words, PepsiCo returns so much money to shareholders that it doesn't have much left over to invest in the business. However, that's not necessarily a criticism. Indeed, even if Pepsi were to try to invest in growth, it's doubtful how much growth it would find. After all, at its size, even finding a new billion-dollar business would barely move the needle. Therefore, I think management is pursuing the correct capital-allocation strategy.
For this reason, I doubt that PepsiCo stock will outperform the market average over the next five years. The company will likely post modest annual top-line growth. I expect it will continue earning a healthy profit. And much of this profit will be returned to shareholders through its dividend and share repurchases.
With this combination, I believe PepsiCo stock extremely likely to post positive returns over the long term. And that certainly counts for something. But for investors looking to only pick stocks with a high chance of outperforming the market average, it's likely best to look for other investment opportunities.
