3 Reasons Why This 4%-Yielding Dividend King Is the Ultimate Passive Income Powerhouse to Buy Now
4 weeks ago
0 5 minutes read
PepsiCo (NASDAQ: PEP) stock fell 4.5% on Tuesday, putting it within just a couple of percentage points of a 52-week low.
The food and beverage titan reported fairly weak full-year 2024 results. 2025 guidance calls for a prolonged slowdown across its business units, with a low single-digit increase in organic revenue and a mid-single-digit rise in core constant currency earnings per share (EPS).
Despite the poor results and bleak outlook, here are three reasons why PepsiCo is a dividend stock worth buying now.
Image source: Getty Images.
PepsiCo is a highly diversified business — both in terms of the products it sells and its geographical reach. Compared to a company like Coca-Cola, which almost exclusively focuses on the non-alcoholic beverage category, PepsiCo owns Frito-Lay and Quaker Foods, and has dozens of brands spanning coffee, tea, energy drinks, soda, juice, chips, snacks, dips, spreads, and more.
PepsiCo benefits from diversification because the company isn’t tied to one product or end market. But diversification can also weigh down the broader business.
As you can see in the following table, Frito-Lay North America, Latin America, and Asia Pacific, Australia and New Zealand, and China are all fairly high-margin. But PepsiCo Beverages North America — the largest segment by revenue — is also PepsiCo’s lowest-margin segment.
Segment
2024 Revenue
2024 Operating Profit
2024 Operating Margin
Frito-Lay North America
$24.755 billion
$6.316 billion
25.5%
Quaker Foods North America
$2.676 billion
$303 million
11.3%
PepsiCo Beverages North America
$27.769 billion
$2.302 billion
8.3%
Latin America
$11.718 billion
$2.245 billion
19.2%
Europe
$13.874 billion
$2.019 billion
14.6%
Africa, Middle East, and South Asia
$6.217 billion
$798 million
12.8%
Asia Pacific, Australia and New Zealand, and China region
$4.845 billion
$811 million
16.7%
Total
$91.854 billion
$12.887 billion
14%
Data source: PepsiCo.
Energy drinks have the potential to boost PepsiCo’s beverage business. PepsiCo has a distribution agreement with Celsius Holdings, as well as a minority stake. But PepsiCo didn’t mention energy drinks or Celsius in its prepared remarks. When an analyst asked about energy drinks, management responded by brushing off the question, saying there was nothing to update about, which seemed a little strange given past optimism about energy drinks.
PepsiCo is facing demand challenges and difficult pricing power across its business. However, on the earnings call, management reaffirmed its intentions to deliver high single-digit EPS growth over the long term.
PepsiCo seems optimistic about its long-term growth potential, but didn’t shy away from the extent of near-term challenges and the sluggish growth the business is projected to have in the near term.
Understandably, the stock has sold off, given PepsiCo’s slowdown. But PepsiCo has fallen to bargain bin levels, especially for such a high-quality company.
Based on 2024 full-year EPS of $6.95 and a stock price of $143.49 at the time of this writing, PepsiCo has a price-to-earnings (P/E) ratio of just 20.6. That’s a steep discount compared to the S&P 500 P/E ratio of 30.2.
PepsiCo’s median P/E ratio over the last three-year, five-year, seven-year, and 10-year periods has ranged from 26.1 to 26.6. So investors are getting the chance to scoop up shares of PepsiCo at a considerable discount to its historical average.
Granted, short-term-minded investors may argue that PepsiCo deserves to trade at a discount, because it isn’t growing as fast as it did in past years. But long-term investors know that some of the best decisions are made when a great company sells off for factors that have little to do with the core investment thesis.
PepsiCo has a clear runway for long-term growth, especially internationally. It may take a couple of years for the company to get back to the pace of growth investors had grown accustomed to in recent years. But the valuation already reflects this challenge. Better yet, investors can get paid to wait for the business to recover, with an impeccable dividend.
PepsiCo’s dividend is as good as it gets. The company just announced a 5% dividend raise, marking the 53rd consecutive year it has increased its payout. That means PepsiCo retains its coveted spot on the list of Dividend Kings, which are companies that have paid and raised their dividends for at least 50 consecutive years.
PepsiCo’s dividend raise boosts the quarterly payout to $1.4225 per share, starting with the June 2025 payment. Based on a forward dividend of $5.69 per share and a stock price of $143.49, PepsiCo has a yield of 4%. That’s a significantly higher yield than other Dividend Kings like Procter & Gamble — which has a 2.4% yield — or even Coca-Cola’s 3.1% yield.
Over the last 15 years, PepsiCo’s yield has mostly hovered around 2.5% to 3%. So the stock’s sell-off, plus consistent raises, have pushed its yield to historically high levels — creating a compelling passive income opportunity for patient investors.
PepsiCo isn’t firing on all cylinders, but neither is the stock price. At times like this, it’s best to focus on the big picture to see if the sell-off has gone too far.
The packaged food industry is in a slowdown, not just PepsiCo. PepsiCo is still growing in key markets and exhibiting good margins, but it’s being weighed down by a strong dollar, which is leading to unfavorable foreign exchange. The stock is cheap by historical levels, and the yield is far higher than historical averages. So, the struggles in the underlying business have been more than reflected in the valuation.
Now is the perfect time for patient investors to scoop up shares of PepsiCo and collect passive income while the business navigates these challenges. PepsiCo’s high yield provides a worthwhile incentive to simply hold the stock, instead of trying to time the turnaround.
Add it all up, and PepsiCo stands out as one of the best dividend-paying value stocks to buy now — especially for risk-averse investors looking for a company they can count on to keep raising its dividend, even when the business isn’t at its best.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.
