To The Moon

$Pepsi(PEP)$

PepsiCo (ticker PEP) is currently trading at its 52-week low following its latest quarterly earnings report. However, it’s not just a one-year low—the stock has now dropped to a four-year low. The last time it traded at this level, around $143.50 per share, was in May 2021.

This decline is significant for several reasons, but one key takeaway is the company’s dividend yield history. At present, PepsiCo has its highest starting dividend yield in over five years, and even when looking at the past decade, including the 2020 market downturn, this remains one of the highest levels.

Currently, PepsiCo’s dividend yield stands at 3.71%, with a 10-year average dividend growth rate of 7.7% and a five-year rate of 7%. In 2024, the company announced a 7% dividend increase, but management recently stated in their earnings report that they expect a more modest 5% dividend hike in 2025. While this is still a reasonable increase for a mature company, it is lower than the historical averages.

A potential concern is the company’s free cash flow payout ratio, which has steadily increased over the past decade. In recent years, PepsiCo has allocated over 80% of its free cash flow to dividend payments, which may limit future dividend growth.

Earnings and Stock Performance

In Q4, PepsiCo reported:

• Non-GAAP EPS of $1.96, beating estimates by $0.02

• Revenue of $27.78 billion, down slightly year-over-year and missing expectations by $110 million

Following the earnings release, the stock dropped 4.51% in a single day.

2025 Guidance and Market Reaction

The primary concern for investors appears to be PepsiCo’s guidance for 2025:

• The company expects low single-digit organic revenue growth

• A mid single-digit increase in core constant currency EPS

To put this in perspective, PepsiCo’s 10-year revenue CAGR is 3.25%, and its 10-year net income CAGR is 3.9%. While the past five years have shown slightly stronger growth, the new guidance suggests a slowdown, which has raised concerns among analysts.

PepsiCo has experienced consistent but modest growth in both revenue and net income over the past decade. According to profitability data:

• 10-year revenue CAGR (compound annual growth rate) is 3.25%

• 10-year net income CAGR is 3.9%

While growth has been slightly faster over the past five years, reflecting some improvements in profitability, PepsiCo remains a mature company.

Concerns About Slowing Growth

A major concern stems from the company’s updated guidance. Management now expects low single-digit organic revenue growth—likely in the 1% to 3% range—which is even lower than its historical averages.

Adding more context, PepsiCo initially guided for 4% organic revenue growth in Q3. However, in Q4, they revised this downward to low single digits and have now taken an even more conservative stance for 2025. Given this, it’s not surprising that the stock has sold off, as negative guidance revisions typically trigger declines.

Potential for Future Growth

The key question now is whether this slow revenue growth is a long-term issue or if PepsiCo has avenues to reaccelerate expansion. One strategy the company is pursuing is expanding into healthier snack options to counter organic sales challenges.

However, regulatory concerns could add pressure. Some analysts have pointed to the potential impact of RFK Jr. being appointed as the U.S. Health Secretary, as this could bring more scrutiny to PepsiCo’s ingredient choices. Management has acknowledged this trend, stating that:

“There is a higher level of awareness among American consumers regarding health and wellness, driven by conversations about obesity drugs and other health-related discussions.”

Is the Selloff Justified?

Over the past year, PepsiCo’s stock has declined 12%, despite being historically stable with predictable cash flows and dividends. Now trading at a four-year low, the key question is whether this decline is warranted—or if it presents a buying opportunity at a more attractive valuation.

Valuation Analysis of PepsiCo

Discounted Cash Flow (DCF) Analysis

Using a 5% growth rate (which could be considered optimistic), the DCF valuation suggests a fair price of $95 per share—significantly below Pepsi’s current stock price.

Historical Multiples Valuation

• Trailing 12-month P/E ratio: 21.06

• 10-year average P/E ratio: 25.21

• This represents a 16.5% discount compared to historical averages.

While this might suggest PepsiCo is undervalued, a key question remains: Does slowing revenue growth justify a higher multiple? The answer is likely no—but whether the company deserves such a sharp reduction in valuation is debatable.

Comparable Multiples Valuation

Comparing PepsiCo to similar companies, the average P/E ratio of competitors is 27.94.

• If Pepsi were valued at this industry average, its intrinsic value would be around $184 per share, which is significantly higher than the current price.

Dividend Discount Model (DDM)

Assuming a 4.75% dividend growth rate and an 8% discount rate, the DDM valuation places the fair price at $172 per share—around 20% above the current market price.

• Given Pepsi’s strong dividend history (over 50 consecutive years of increases), this model is especially relevant for dividend-focused investors.

Final Valuation & Investment Considerations

After averaging the different valuation methods, we arrive at an intrinsic value of approximately $150.33 per share—which is only about 5% higher than the current price. However, applying a 10% margin of safety, PepsiCo is not quite within an ideal buy range yet.

Should You Buy PepsiCo Stock?

• For defensive investors looking for stable dividends, Pepsi is an attractive opportunity. It offers predictable cash flows and a historically high starting dividend yield.

• For growth-focused investors, Pepsi may not be the best option, as its revenue growth is slowing, and its potential for significant share price appreciation appears limited.

Conclusion

PepsiCo appears slightly undervalued, but the discount may not be large enough to justify a strong buy unless you're prioritizing defensive investing and reliable dividends. While PepsiCo is currently undervalued, its slowing revenue growth and higher payout ratio suggest a more cautious approach. Investors seeking reliable dividends and stable cash flows may find it an attractive long-term holding. However, those looking for high growth in both dividends and share price appreciation might prefer other options.

What do you think? Would you buy Pepsi at its current valuation?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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