This Dividend King Yields Over 4% and Trades Near Its 52-Week Lows, But Don’t Rush to Buy the Dip

There are just about five dozen stocks in the “Dividend King” universe, which are companies that have raised their dividends for at least 50 years. Among them is beverage giant PepsiCo (PEP), which has increased its dividends for 54 years. This year, it raised its annual dividend by 4% to $5.92 per share, implying a dividend yield of over 4.2%.

While PepsiCo boasts a dividend yield that’s three times the S&P 500 Index ($SPX), the higher yield is primarily due to its underperforming stock. PEP stock is down 10% over the last five years and is currently trading near its 52-week lows. The contrast with Coca-Cola (KO) couldn’t be starker, and the stock is trading just about 5% below its 52-week highs. The divergent price action is reflected in the dividend yield, and KO’s yield is just about 2.4%. Let's focus on PepsiCo and examine whether the stock is a buy, particularly for investors looking for high dividend stocks.

Why Has PepsiCo Stock Been Falling?

On the macro level, the food industry is battling input cost inflation. Moreover, higher gas prices have lowered disposable incomes, and many lower- and middle-income families have been cutting down on their spending. On a more company-specific level, PepsiCo has been a story of two moving parts. Its North America operations have been weak while the international business has been quite resilient despite the macro headwinds from higher gas prices. In Q2, PepsiCo Foods North America (PFNA) reported an annual decline of 2% in organic sales, while PepsiCo Beverages North America (PBNA) reported a mere 1% growth, with both the numbers trailing Street estimates.

In his prepared remarks accompanying the Q2 earnings release, CEO Ramon Laguarta said, “Results were tempered in the quarter as U.S. food and beverage category performance moderated with consumer budgets tightening due to rising inflationary pressures.” In particular, sales at convenience and gas channels have been quite weak, largely because of higher gas prices taking a toll on the finances of many families. The road to recovery would be long, and CFO Steve Schmitt said in his prepared remarks, “Our North America business was softer than we anticipated in the second quarter, and we now expect a more gradual improvement in performance trends for the balance of this year.”

PEP Stock Forecast

The weakness in the North America market wasn’t only a Q2 thing for PEP, and the continued weakness prompted Citi to downgrade the stock to “Neutral” from “Buy” following the confessional. The brokerage lowered its target price from $170 to $145, which is lower than PEP’s mean target price of $155.09. Of the 23 analysts polled by Barchart, seven rate it as a “Strong Buy” and one as a “Strong Sell.” The remaining 15 rate it as a “Hold” or some equivalent.

Should You Buy PepsiCo Stock?

That PepsiCo is not in the best of health is captured in its price action. Amid a sagging stock price, it unsurprisingly attracted activist investor attention, and Paul Singer’s Elliott Management disclosed a $4 billion stake last year. The fund pushed for a turnaround at the beverage giant, and among others, the company lowered prices to boost volumes and announced it would cut around a fifth of its offerings. At the same time, PepsiCo said that it would accelerate the launch of new products and invest more in marketing.

From a valuation perspective, PepsiCo trades at a forward price-to-earnings (P/E) multiple of just 16.3x, which is significantly below its historical valuations as well as where the average S&P 500 Index constituent trades.

I believe there is a significant margin of safety in PEP at these levels, and the downside should be limited since much of the negatives are already priced into the stock. A sustained recovery in the stock would, however, depend on how the company addresses the prolonged weakness in the North American market.

All said, PEP stock could find a place in portfolios of investors looking for high-yield defensive stocks given its tepid valuations, high dividend yield, and potential for capital appreciation on turnaround efforts.