PepsiCo's (PEP +1.34%) shares have had more fizzle than fizz recently. The stock has fallen more than 10% from its peak over the last 12 months. Meanwhile, the S&P 500 index has soared over 30% during the same period.
Don't pour Pepsi down the drain just yet, though. Here's why this beaten-down S&P 500 Dividend King is a stock you can buy and hold forever.
NASDAQ: PEP
Key Data Points
Why PepsiCo stock has declined
Throughout much of the last decade, PepsiCo's total returns outperformed the S&P 500. Why has the stock declined over the past year? There are several reasons.
Most importantly, PepsiCo's sales have slipped. In the fourth quarter of 2023, net revenue fell to $27.8 billion from nearly $28 billion in the prior-year period. That's not a big slide, but the company's top line moved in the wrong direction.
PepsiCo CEO Ramon Laguarta noted in the Q4 earnings call that geopolitical events are negatively impacting some of the company's markets. The recall of Quaker granola bars and cereals hasn't helped, either.
High inflation has hurt the food and beverage maker in a couple of ways. Consumers looked for ways to cut spending with overall prices soaring, resulting in headwinds for PepsiCo's product sales. At the same time, the company faced commodity inflation that pushed its costs up.
We can't overlook the change in investor sentiment, either. With the new bull market officially starting last year, growth stocks returned to favor at the expense of consumer defensive stocks such as PepsiCo.
Poised for a pop?
I don't foresee investors giving up on growth stocks and returning en masse to relatively safe stocks such as PepsiCo in the near future. However, PepsiCo's shares could very well be poised for a pop.
For one thing, inflation is moderating (albeit not as much or as quickly as preferred). PepsiCo CFO Jamie Caulfield confirmed in the Q4 call that the company expects lower commodity inflation in 2024. Just as important, consumers could spend more on soft drinks, energy drinks, and snacks with inflation waning.
Wall Street is generally bullish about the stock. The consensus 12-month price target for PepsiCo reflects an upside potential of around 8.5%. That projected level of return isn't too shabby considering that the company also pays a dividend with a yield of nearly 3%.
Buy and hold forever
Whether or not PepsiCo stock rebounds strongly over the next few months, it's still a great pick for long-term investors. The main reason why is the company's resilient underlying business.
PepsiCo owns some of the most well-known and enduring brands on the market. Aquafina, Cheetos, Doritos, Fritos, Gatorade, Lays, Mountain Dew, Pepsi, Quaker, Rockstar, Ruffles, and Tostitos are household names.
The company is rock-solid financially. Even with its challenges last year, PepsiCo raked in more than $9 billion in profits. Its cash stockpile totaled nearly $9.8 billion at the end of 2023.
Then there's the dividend. PepsiCo has increased its dividend for a remarkable 52 consecutive years. It recently announced a 7% dividend increase payable in June 2024.
To be sure, PepsiCo is highly unlikely to deliver the jaw-dropping gains we've seen from the so-called "Magnificent Seven" stocks over the last year or so. However, investors can count on reliable and steady total returns over the long run.
One of Aesop's fables told the story of the tortoise and the hare. The tortoise won the race because it kept plodding along while the hare was more erratic. I think PepsiCo is like the tortoise. That's the kind of stock to buy and hold forever.
