PepsiCo is a beverage giant, but it is so much more than that — and it looks like the stock is fairly priced today.
PepsiCo (PEP -0.31%) is one of those companies that has been run so well for so long that investors tend to afford it a premium valuation. When the stock dips down to a fair price, or maybe even a bit lower, you jump on it. That’s point No. 3 for why you should buy PepsiCo like there’s no tomorrow right now. But let’s look at points 1 and 2 first.
1. PepsiCo does a lot of things very well
PepsiCo’s namesake brand has now fallen to No. 3 in the cola wars, behind Coke and Dr Pepper. That’s not a great look, but when you step back and consider PepsiCo’s full suite of beverage products, it is still the second-largest drink maker in the world. Some might argue that being No. 2 isn’t the same as being No. 1, and that’s true. But PepsiCo still has the size, distribution, marketing, and innovation chops to be a very profitable business.
Image source: Getty Images.
Where PepsiCo really shines is within the salty snack category. Its Frito-Lay division is the No. 1 player in the snack space. Like the beverage operations, it has the size, distribution, marketing, and innovation skills to excel business-wise and profit-wise. Then there’s the Quaker Oats business, which makes packaged consumer food products. While PepsiCo is just one of many large players in that sector, combined with its No. 2 spot in beverages and No. 1 spot in salty snacks, it is easily one of the most important partners for retailers, from grocery stores to convenience stores, around the world.
Investors often favor pure-play companies like Coca-Cola over diversified businesses, believing that a singular focus will lead to better business results. That may or may not be true. The flipside of the argument is that a company with a diversified business can lean on strong divisions while others are facing headwinds and, thus, grow more reliably over time. PepsiCo’s diversification is a big reason why investors, particularly more conservative types, will like the stock.
2. PepsiCo has performed very well over time
There are any number of ways to look at a business’ performance. But for many investors, success is defined as paying a reliable dividend. Given that PepsiCo is a highly elite Dividend King, with 52 consecutive annual dividend increases to its name, it is pretty clearly a very successful company. You simply can’t build a 50-plus year streak of dividend increases without doing something right.
When it comes to performance, you can also look at the consumer staples giant’s No. 1 position in salty snacks and No. 2 place in beverages. There’s no way a company could hold on to those industry-leading positions if it wasn’t performing at the top of its game year in and year out. So, over the long term, PepsiCo has proven itself to be well run and the kind of company that investors could happily sleep well at night owning in their portfolios.
But even well-run companies go through difficult periods — and that sets up the last point.
3. PepsiCo looks attractively priced
Over the past year, PepsiCo’s stock has lagged behind the S&P 500 index and the average consumer staples company, using the Consumer Staples Select Sector SPDR ETF as an industry proxy. The reason is that the company’s financial results haven’t been as strong as investors would like and have trailed behind key rivals, like Coca-Cola. Given PepsiCo’s long and successful history, it probably isn’t worth getting too upset about short-term performance. It is highly likely that, in time, the company will get itself back on track.
However, that laggard stock performance has set up an opportunity for long-term investors. Simply put, PepsiCo looks kind of cheap right now. The price-to-sales, price-to-earnings, price-to-cash flow, and price-to-book value ratios are all below their five-year averages. The nearly 3.2% dividend yield, meanwhile, is toward the high end of the stock’s historical yield range. All this speaks to a stock that appears relatively cheap, and that’s the final, and perhaps most important, reason to consider buying PepsiCo right now.
PepsiCo: Strike while the iron is hot
Great companies don’t go on sale very often. PepsiCo’s industry-leading businesses, long history of success (and rewarding investors via dividend growth), and valuation all speak to the opportunity that investors have right here and right now. If you think in decades and not days, this is the time to buy PepsiCo. Your future self will very likely thank you if you do.
GIPHY App Key not set. Please check settings