Large-cap consumer staples stocks have trailed other sectors this year. The S&P 500 Consumer Staples index gained 10.7% year to date through Aug. 24. During this time, the S&P 500 ex-Consumer Staples index rose 11.9%.
NASDAQ: PEP
Key Data Points
However, investors shouldn't give up on the consumer staples sector. Patient investors can find bargains in it, but stock selection will prove crucial.
PepsiCo (PEP +0.82%) presents such an opportunity.
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PepsiCo's moving in the right direction
PepsiCo's previous results were lackluster, with sales volumes pressured by higher prices. That was the case despite its portfolio of well-regarded beverage and food brands like Pepsi, Gatorade, Mountain Dew, and Quaker.
With a push from activist investor Elliott Investment Management, management took steps to boost growth and profitability. One step, cutting prices, appears to have resonated with consumers. It's also looking at cost-cutting measures and trying to develop new products.
Investors can see evidence that lower prices have positively impacted sales in the company's top line. PepsiCo's second-quarter revenue, adjusted to factor out foreign currency translation effects and the impacts of acquisitions and divestitures, grew 2.4% year over year. That might not sound exciting, but sales volume gains accounted for 1 percentage point of the growth.
For the year, management expects a top-line gain of 2% to 4%. But longer term, if PepsiCo can produce more innovative products that resonate with people, I would expect to see that rate increase.
Collecting dividends
In the meantime, PepsiCo has built an enviable track record of dividend payments. It has made quarterly payments since 1965. Even more impressive, the board of directors has increased those payouts for 54 straight years. When that streak surpassed the half-century mark, PepsiCo earned entry into the elite group of companies known as Dividend Kings.
Most recently, the board of directors approved a 4% increase in June's payout to $1.48 per share. At the new rate and the current share price, the stock has a 4.1% dividend yield. That's nearly quadruple the S&P 500's (^GSPC -0.23%) 1.1% yield.
Valuation
The final piece of the puzzle is to look at the stock's valuation. It's become more attractive since the start of this year.
Over the course of 2026, its price-to-earnings (P/E) ratio dropped from 24 to 18. That's a much better valuation for new buyers than the S&P 500's P/E multiple of 30.
PepsiCo's stock also looks attractively valued compared to its historical P/E ratio. It has a 10-year median P/E ratio of 26.
With improving results, an attractive valuation, and a high dividend yield, PepsiCo shares represent a good buying opportunity presently.
