Summary
PepsiCo has dramatically underperformed the S&P in the last two years.
As a result, the stock is now offering a 9-year high dividend yield.
PepsiCo has raised its dividend for 46 consecutive years. It has raised its dividend at an 8% average annual rate in the last decade.
Two years ago, I advised investors to stay away from PepsiCo (PEP) due to its rich valuation and the rising interest rates, which would increase its interest expense and would exert pressure on its valuation. My thesis was vindicated, as the stock has dramatically underperformed the S&P in the last two years. It has remained flat whereas the index has rallied 30%. However, due to this poor stock performance, its valuation has significantly improved and the stock is now offering a 9-year high dividend yield. Therefore, PepsiCo has become attractive lately.
Business overview
PepsiCo has 22 brands that exceed $1 B in annual revenues. It is also the No. 1 brand in market share in most major markets, such as U.S., Canada, U.K. and Russia, and generates 90% of its total retail sales from the Nr 1 or Nr 2 market share position. While the company sells its products in more than 200 countries, it still generates 58% of its operating profit in the U.S.
PepsiCo has been negatively affected by a secular trend, namely the increasing health consciousness of consumers. To be sure, the consumption per capita of carbonated drinks has fallen to its lowest level since 1985. In addition, some U.S. states and some countries have drastically boosted their taxes on sweet beverages in order to reduce their budget deficits. This trend is not likely to attenuate anytime soon. Consequently, strong headwinds are facing the flagship product of the company.
