Quality growth is rarely available at a discount on the stock market. Absent big market downturns, investors tend to push these successful businesses ahead of the indexes, leading to stretched valuations that can limit long-term returns. That’s especially true during rallies like the one that’s characterized this past year. Yet you can still find deals by considering strong stocks that have fallen out of favor for dubious reasons.
PepsiCo (PEP 0.78%) is a perfect example. The beverage and snack giant is growing sales at a double-digit rate today, yet the stock is down 13% in the past six months. Read on for some good reasons to stock up on this unloved stock right now.
1. Growth and market share
Despite the recent stock price slump, there was little for investors to feel disappointed about in PepsiCo’s latest growth trends. Organic sales are up 12% through most of 2023, the company announced in mid-October. That’s on top of Pepsi’s 14% spike in the prior-year period.
Sure, that growth is being driven entirely by rising prices today, which isn’t ideal. Volume was flat in its beverage business and declined 2% in the snacks segment. All things being equal, Pepsi aims for balanced growth, with both prices and volumes contributing to organic sales gains.
But it’s a testament to its pricing power that Pepsi has been able to offset cost inflation without sacrificing market share. Investors can take that as a sign that growth will accelerate as inflation slows back down in the coming quarters.
2. Sparkling profits
Profitability is headed in the right direction, too, with both gross and operating profit margins rising this past quarter. Pepsi isn’t approaching its main rival, Coca-Cola (NYSE: KO), on this score, but it’s still generating ample profits today. Earnings were up 16% through the first three quarters of 2023, after adjusting for currency exchange rate swings.
Those rising prices helped, but Pepsi is also getting aid from cost cuts and from rising demand for nontraditional beverages like energy drinks. This past quarter was the sixth consecutive quarter in which profit rose at a double-digit rate. “We are very pleased with our performance,” management said in an October call with investors. Gains like these in a tough selling environment suggest that Pepsi has room to expand earnings at a much quicker rate through the next industry upturn.
3. Cash returns
Pepsi is on track to deliver $8 billion of cash to shareholders this year, with most of that haul arriving through dividend payments. That payout has risen for over 50 consecutive years, making this consumer-staples business a Dividend King. The stock’s underperformance last year boosted the yield to a generous 3%, which investors should consider a bonus on top of the capital appreciation they’ll likely see from holding the stock. Pepsi is valued at just 2.5 times sales, or less than half of Coca-Cola’s premium.
Sure, you aren’t getting as profitable a business by owning Pepsi over Coke today. But the stock delivers solid sales and earnings growth, ample cash flow, and a rising dividend payment. Pepsi is more diversified as well, thanks to its snack-food business that generates most of its earnings each year. Consider taking advantage of the stock’s recent drop to put this high-performing business in your growth portfolio.
