You probably know the names Pepsi and Frito-Lay, even if you live outside the United States. PepsiCo (PEP -0.62%), the company behind both brands, is every bit as iconic as Coca-Cola, one of its biggest rivals. If you're a long-term investor with a growth and income approach, you might want to consider adding the salty-snack giant (and second-place soda maker) to your portfolio. Here's why.
PepsiCo has a great track record
Right up front, it's important to recognize that a company with a $220 billion market cap isn't likely to be an exciting company to own. It's well beyond the size at which it can grow its business rapidly, so growth investors will probably want to look elsewhere. But that doesn't mean PepsiCo is a bad company, just a mature one. It's the type of company you buy when it's reasonably priced, or cheap, and hold it for decades.
The biggest highlight of the company's long-term success probably shows up in its dividend record. The company is a highly elite Dividend King, with over five decades of annual dividend increases behind it. That's a streak you simply can't build by accident. It takes consistently strong execution in good economies and bad. The average annualized dividend increase over the past decade, meanwhile, was around 8%. That's a solid number, well above the historical growth rate of inflation, but not massive. In other words, slow and steady is basically what investors have been rewarded with over time.
Now, one caveat here is that the dividend yield is 3%. While that's higher than what you could get from an S&P 500 Index fund, it isn't likely to get dividend-focused investors all that excited. In all, PepsiCo looks like an attractive growth and income stock, but those looking to maximize either of those two extremes -- growth or income -- will probably be let down.
PepsiCo is worth a look today
If you own PepsiCo already, you might be a bit worried by the stock price action. The shares have fallen roughly 15% from their 52-week highs. Don't lose any sleep, though. Recent financial performance has been fairly strong even in the face of rising inflation. For example, organic revenue growth was a lofty 9.5% in 2023. That was helped along by price increases, of course, but that's what consumer-staples companies do when trying to offset rising costs. It's worth noting that volumes were a little weak, but that's what happens when consumer-staples companies raise prices. Eventually, consumers get used to the higher prices.
This pullback really isn't a good reason to sell the stock if you're a long-term growth and income investor, though it might be a good reason to buy some more shares.
If you don't own PepsiCo yet, meanwhile, you might want to jump in. The dividend yield has been higher in the past, but the price pullback has pushed the yield toward the high side of the historical yield range. That hints that the stock has been put on the sale rack. A screaming buy? Perhaps not, but it does seem fairly priced to a little cheap right now.
That stance is buttressed by more traditional valuation measures such as the price-to-earnings, price-to-sales, and price-to-book value ratios. All three are at or below five-year averages. Not shockingly below by any means, with P/E actually in line with the longer-term average. But taken together with the dividend yield, it appears that investors would be paying a fair price or cheaper. That's not a bad outcome when you're looking at a Dividend King that's operating fairly well in a tough environment.
Don't get too fancy
PepsiCo isn't so cheap that investors should back up a truck and load up on it. But the stocks of well-run companies rarely get that cheap. If you're looking for a reliable growth and income stock, PepsiCo looks like an attractive choice today. You could try to wait for a cheaper entry point, but that might mean you miss the opportunity to buy a great company at what appears to be a pretty fair price.
