When it comes to fun investment ideas, few companies are as fun as PepsiCo (PEP -0.80%). With a portfolio of products that includes Mountain Dew, Cheetos, Quaker Oats, Mug Root Beer, Doritos, Gatorade, and more, there's likely a PepsiCo product for every investor.
However, loving a company's products and investing in the stock are two different propositions. Therefore, investors need to be careful that they're evaluating PepsiCo based on the business and not based on their taste buds. Here's what investors need to consider about this business.
Is there actually a case to sell?
There are various good reasons to sell a stock; personal financial motivations could be a factor. But when it comes to reasons to sell PepsiCo stock specifically, the case is pretty thin.
The business is well established and unlikely to change anytime soon. In other words, it's hard to imagine something that disrupts it and leads to its decline.
However, PepsiCo's maturity could be a reason to sell. To be clear, it has opportunities for growth, as I'll momentarily explain. But growth will likely be modest in a best-case scenario.
Therefore, investors intent on outperforming the average returns for the S&P 500 might choose to sell PepsiCo stock because it will probably be an average performer given its size. Consider that the company generated revenue of over $91 billion in 2023 -- it's hard to move the needle at this size.
What about the case to buy?
If PepsiCo stock might only be an average performer, then is there a good reason to buy the stock today? After all, isn't the main goal to outperform the market average?
It's true that investors often want to outperform the S&P 500. However, there can be other legitimately good reasons for buying PepsiCo stock. For starters, the company pays a very reliable quarterly dividend, and the dividend yield is high at over 3%. That's one of the highest yields it's had in the past decade.
PEP dividend yield data by YCharts.
Moreover, it's not a foregone conclusion that the stock will be a below-average performer. Earnings growth frequently leads to higher stock prices, and PepsiCo can grow earnings because of what's happening in its international business segments.
In North America, PepsiCo breaks out the financials for its beverage business, snacking business, and food business. But in international markets, it lumps the financials from these business lines together, distinguishing only among geographies.
PepsiCo's net revenue in Latin America is up 68% over the last three years to nearly $12 billion. Net revenue in Asia Pacific, Australia and New Zealand, and China Region is up 39% during this time to nearly $5 billion. And in Africa, the Middle East, and South Asia, net revenue is up 34% to over $6 billion.
This growth in recent years has propelled PepsiCo's profits higher thanks to recent efficiencies of scale in international markets. The three aforementioned regions collectively earned the company $2.2 billion in operating profit in 2020. In 2023, these three brought in nearly $3.8 billion -- a massive jump.
If PepsiCo's international business keeps efficiently scaling, then the company could surprise with better-than-expected earnings growth in coming years. Between its high-yield dividend and earnings-growth potential, investors might be fortunate enough to see market-beating returns after all.
The case to hold
The Pepsi-Cola Company got going in 1898, and it has maintained incredible market share in the beverage space during much of its history. Likewise, its Frito-Lay division has also enjoyed top-dog status in the snacking industry for much of the past century. The company simply performs well, year in and year out.
For this reason, there's likely little downside for those who buy PepsiCo stock today. And this low downside risk is a good reason to hold on to shares. Investors are unlikely to lose money with a company such as this. And if things play out well in international markets, then there's upside to enjoy.
In conclusion, I'm saying that the company's stock can deserve a spot in an investors' portfolio. It's good to balance riskier ideas with safe stocks such as PepsiCo. Buying this stock for a portfolio provides limited downside, dividend income, and the chance at some upside as its earnings grow.
