PepsiCo – more than Cola thanks to diversification. (Photo: Freepik, 108motiongraphic)
Like Coca-Cola, PepsiCo has been a popular stock for both large and small investors for many years. The strong business model of the two consumer goods giants and a stable dividend continue to attract investors. Both companies have shown that they can continue to grow through economic ups and downs and offer investors a certain degree of stability even in turbulent stock market times.
In the past 10 years, with the exception of Corona, the maximum drawdown for stocks was 10 percent. Now we are at this drawdown again. Is PepsiCo (or Coca-Cola) currently worth investing in?
PepsiCo – diversify and adapt to consumer trends
PepsiCo, Inc. In contrast to Coca-Cola, is also active in the snack sector and thus offers investors broader diversification. Half of sales come from the snack segment with brands such as Lay’s, Dorito and Cheetos.
Like Coca-Cola, PepsiCo has benefited from its strong brand and status as a “consumer goods” brand, particularly in times of high inflation. PepsiCo was able to pass on rising costs and supply chain problems to customers and even benefit from shrinkflation. Profit growth has recently been significantly higher than sales growth.
However, it is also a fact that, on the one hand, inflation and, on the other hand, consumers’ willingness to pay more and more are coming to an end. Growth should slow down significantly in the next few years. Nevertheless, the giant is focusing on further diversification. Most recently, a share in the popular hummus brand “Sabra” was acquired. In doing so, Pepsi shows that it is adapting to consumer trends and prioritizing the trend towards more health-conscious snacks.
PepsiCo has been a particularly popular stock recently
In times of inflation, the market recognized PepsiCo’s special market position and that the company was able to use a few tricks to increase its profits above average. Investors took advantage of Pepsi’s special position and also valued the stability and dividend. From mid-2021 alone (US$130) to the last all-time high (US$195), the stock gained 50 percent without dividends. This is remarkable, because over the last 10 years the pure share price return has only been 60 percent (including dividends 110 percent).
PepsiCo has to fight for growth
Although the share is currently at a discount to the average Price-earnings ratio (P/E ratio) and offers a dividend yield of over 3 percent, an investment should be made with caution depending on your goal. Recent growth has been driven by inflation tricks. Due to its size, takeovers and investments cannot contribute to particular growth.
In addition, there are uncertainties regarding the medium and long-term effects of weight loss medications, which could reduce appetite and jeopardize sales of Pepsi products.
The US government poses a further challenge. It is considering introducing more measures such as sugar taxes. This would be less critical if the high costs and increased price sensitivity of consumers were not already a burden. Despite increasing product diversification, Pepsi remains heavily focused on high-sugar and high-salt beverages and snacks, which could pose further challenges in an increasingly health-conscious environment.
Who is PepsiCo interesting for?
PepsiCo appears attractive to dividend investors and defensive investors due to its solid dividend yield. However, you should not expect the market to outperform solely through dividend distributions. Falling sales volumes, limited growth prospects as well as political and sales-related challenges currently make entry less attractive.
Especially since the share has only had limited price gains over the last 10 years and the average annual dividend increase was only around 6 percent. Compared to other companies with double-digit dividend growth and higher sales and profit growth, PepsiCo is therefore less interesting despite the recent share price decline.
However, a medium-term opportunity arises from the current valuation. The stock has a drawdown of around 10 percent and the P/E ratio is only 18, which in the past has often represented a good time to enter the market in order to achieve a few percent profit in the medium term.
Shareholders who have already invested could continue to hold their positions due to the reliable dividend payments, as Pepsi remains an established brand with a stable dividend. However, the share only offers limited upside potential in the coming years, making it appear less attractive compared to a broadly diversified ETF.
And Coca-Cola?
Given that Coca-Cola faces similar challenges to Pepsi and is also less diversified, especially in the snack segment, the conclusion can also be applied to Coca-Cola – with the additional disadvantage of less diversification.
Disclaimer:
Not investment advice. No call to buy or sell securities.