Pepsico: Stock & Dividend Analysis

I’m always amazed at how much of a role sentiment plays in the investing world.

Stocks with strong sentiment behind them get a bunch of advantages. They tend to trade at a higher multiple as optimistic investors focus more on the story and less on the valuation. They also have an easier time raising capital to pay for acquisitions, and have the advantage of an army of investors consistently buying and supporting the stock price.

Negative sentiment is equally fascinating. It almost always happens after the stock has fallen a bit and we’re all looking for an explanation. It’s as if all the previous bulls woke up one day, checked their accounts, and suddenly realized their shares were lower. Evangelism changes to condemnation; all anybody wants to talk about is all the things wrong with this putrid dog of a stock.

One thing I’ve discovered over the years is that the perception often doesn’t mesh with reality. The underlying business is often fine, and issues are often temporary. There are exceptions, of course, and there always will be. But I’ve found that good businesses tend to continue to be good. Moats don’t get eroded overnight.

Today we’re going to talk about Pepsico (NASDAQ:PEP), a stock that is in a severe downturn due to a multitude of different factors. Are the bears right here, or is it one of those situations where sentiment is driving a good company down?

For those of you not in the grocery biz, here’s the Pepsi story in a nutshell.

The company has six different divisions, but we’re going to keep it simple for now. I like to separate Pepsi into three different parts, including:

Pepsi groups all the food products together, but since I used to be a Frito guy I couldn’t possibly approve of such behaviour. Get that Cap’n Crunch nonsense away from my chips! But Pepsi does it, so I guess we can too.

Combined, the food part of Pepsi accounts for about 60% of total sales, while soda and other beverages account for the other 40%. From there, sales are grouped into six different divisions, which include:

The North America business (Canada and the United States) account for 60% of total revenue, split fairly evenly between soda and foods. But foods is much more profitable, which is largely driven by Frito Lay in North America. It’s a hell of a business, while I’ve always considered soda to be more meh. 39% of total profits come from North America Foods, from only 30% of total revenue.

I’ll also point out the weakness in Pepsi’s international soda business. It’s nicely profitable for the parent (just 5% of revenue for the International Beverages Franchise division, but 11% of profits), but that doesn’t tell the whole picture. Coca-Cola dominates places like Latin America, where it has a ~60% market share versus about 15% for Pepsi. Coca-Cola is similarly dominant in Europe, Asia Pacific, and Africa, markets where Pepsi pretty much leaves local bottlers alone.

Coca-Cola’s dominance in Latin America is one of the reasons I like Coca-Cola FEMSA (NYSE:KOF) so much. You don’t get a 60% market share by accident.

Pepsi’s worldwide strength is in the potato chip business. It dominates savory snacks in Latin America, is strong in Europe, does fairly well in Asia, and is growing in the fragmented African market. Much of the international profits you see above come from the snack business, not the beverage business.

This weakness in beverages is the main reason why I think Pepsi should spin out that part of the business. But it doesn’t look like that’s ever going to happen, so we’ll move on.

Like a lot of other CPG companies in 2021-23, Pepsico was able to substantially raise prices on its products — both on the food and the beverage side. Inflation was rampant, folks ate at home more, and business was good. The company was able to both pass through price increases (through both raising prices and shrinking sizes) and increase volume. That’s the ticket, no matter what business you’re in. Shares rallied smartly, and everybody was happy.

2024-25 told a different story. Inflation was more under control, business slowed, and consumers started pushing back on price increases. Consumers started making different choices, and strong growth turned into something much more tepid. Revenue growth was 13% in 2021, 9% in 2022, 6% in 2023, and then 0.4% in 2024. It improved to 2.3% in 2025, and is estimated to check in at 5.4% in 2026. But the damage is done, and Pepsi has been labeled a no growth company again.

2025 was also a crummy year for earnings. Pepsi grew the bottom line nicely between 2020 and 2024, before posting a slight earnings decline last year. Per share profits are expected to grow again this year, and get to close to $10 per share in 2028. That’s a very reasonable valuation for a stock that trades for a little under $130 per share as I write this.

With earnings expected to grow steadily over the next few years, where’s the disconnect here? Why has the valuation fallen from a peak of 26x earnings in 2022 to under 15x earnings today?

There are a few things against Pepsi today. The first are GLP-1 risks, which we’ve gone over before. So I won’t spend too much time on them; if you’re interested in reading more, check out this piece I did on the food sector in general.

Another issue is just how unloved the sector is today. Virtually every CPG stock has fallen significantly off the 2022-23 highs, including ones that have no exposure to food at all. Investors chased the hot sector during COVID, and it became overvalued. The move from overvalued to undervalued is a bit reason why drawdowns look so excessive.

I’ll also touch on some specific cost inflation that has affected Pepsi more than other CPG stocks — the cost of aluminum. 2025’s tariffs immediately increased the cost of imported commodity aluminum by 25%. It continues to be tariffed today.

Aluminum is also a victim of the Iran War; two large aluminum smelters in the Middle East were struck by Iran counterattacks, and neither one is back up to its pre-war production. Much of that production passed through the Strait of Hormuz. Now it’s shipped using more expensive alternate methods.

A new issue has emerged lately, interest rates. Although Pepsi’s balance sheet is pretty good compared to its more indebted peers (like Campbell’s, General Mills, or Kraft Heinz), it still has some debt on the balance sheet. Pepsi also has some cheap debt it arranged during COVID coming due in the next few years, debt which looks like it’ll have to be refinanced at a higher rate.

Interestingly, Pepsico has been issuing debt in Euros, and using the proceeds to pay off USD denominated debt. One reason is rates are cheaper in Europe. Another is the company can use Euros generated from its European business to service the debt, which gives it a couple of advantages. Firstly, those are Euros that don’t have to be converted to USD, which can be volatile depending on the exchange rate. And secondly, having more debt serviced by Euros frees up USD to be put to work paying dividends, repurchasing stock, or acquiring U.S. competitors.

Finally, I’ll mention fuel as another headwind. Pepsi moves around a lot of products, and even though it has electrified some of its fleet, it still has big fuel expenses. Investors are acting as if the price of fuel is going to stay elevated for some time.

I should also say that despite these short-term issues, Pepsi is still an attractive business from a return on investment perspective. Pepsi has consistently posted a return on equity of more than 45%, and a return on capital in the 20% range. You can see the dip in 2025, but that looks to be an anomaly.

The opportunity here is simple. Pepsi shares are the cheapest they’ve been in a decade. They’re trading as if the business is in terminal decline, which I believe is a total overreaction.

Let’s start with simple metrics. Pepsi trades for about 15x earnings and 17x free cash flow. Both are flirting with decade-low valuations, and are both more than 25% cheaper than the last decade’s mean.

I’ll also point out that the company is expected to grow both earnings and free cash flow over the next few years. Yes, EPS expansion has slumped from the 10%+ levels of the early 2020s, but this is still a company expected to grow the bottom line by about 5% annually over the next few years, which isn’t bad considering some of the headwinds.

The business looks poised to get better over the long-term, all while the stock falls.

The stock is also cheap from a dividend yield perspective. Pepsi offers a dividend yield of 4.5%, which is almost 50% higher than the typical yield over the last decade. I like buying income at a discount, especially income I think will continue to grow.

Finally, I’ll show a third piece of evidence Pepsi shares are cheap. For years, the stock traded at pretty much the same valuation as Coca-Cola. But that trend has diverged significantly over the last couple of years, and now Coca-Cola trades at a massive premium.

I’ll also note that if you bought Pepsi shares in 2018 — when it was cheapest versus Coke — you not only did incredibly well over the next five years, but you also would’ve outperformed Coke by a significant margin.

First the good news on the buyback front. Pepsi has been a consistent repurchaser of its own shares. Shares outstanding have steadily declined over the last decade, even after giving out stock-based compensation to thousands of employees.

The bad news is it hasn’t made a huge amount of progress on this front. Shares outstanding fell from 1.44B in 2016 to 1.37B in 2025, a decline of about 4% in a decade.

Onto the dividend, where I’m going to rant a little bit.

Twitter, Seeking Alpha, and countless message boards are full of declarations from Pepsi bears over the last 12-18 months or so, shouting from the proverbial rooftops that the company was about to slash its dividend, and it didn’t have the free cash flow to afford the payment. There’s a graphic that I won’t share which shows Pepsi’s payout ratio approaching 100% of free cash flow.

The graphic is accurate, and Pepsi’s dividend payout ratio was close to 100% of free cash flow in 2024 and 2025. But it doesn’t tell the whole picture. Pepsi spent aggressively on new tech, vehicle electrification, and upgrades to automate certain parts of Frito Lay factories in 2024. In 2025 it spent more aggressively on acquisitions, shelling out an aggregate $3.4B buying Siete Foods and Poppi.

Take away those two one-time purchases, and Pepsi’s dividend payout ratio was much more reasonable in 2024 and 2025.

2026 looks to be more back to normal. Pepsi is projected to generate some $10.5B in free cash flow in 2026, versus $7.6B in 2025 and $7.1B in 2024. It’ll pay around $5.80 per share in dividends, which works out to $7.9B. That’s an elevated 75% payout ratio, but one that’s certainly manageable.

The payout ratio should creep lower in 2027 and 2028 too, with the company expected to grow free cash flow to $11.7B next year and $12.8B in 2028. That represents a 10%+ annual growth rate, while dividend growth is more likely to be in the 4-5% range. I see a world where the dividend payout ratio is closer to 60% of free cash flow by the end of the the decade as free cash flow grows a lot faster than dividends.

Pepsi should also get some credit for its superb long-term record of dividend growth. It has upped the dividend each year for 54 consecutive years. It’ll make it 55 years in February when it announces another one. That record is worth something, dammit. These guys know what they’re doing, dividend-wise.

My only word of caution about the dividend is I think we retreat to a 4-5% dividend growth rate over the next few years, with potentially a little higher growth come say 2028 or so. That’s still decent, especially when combined with such a generous starting yield and 50+ years of annual hikes.

Dividend security: High
Dividend growth potential: 4-6%

There’s a lot I like about owning a chip company. It consistently generates better margins than most other food businesses. Innovation is easy, and there are unlimited new ideas that don’t cost that much to implement. People love chips, and there are zero substitutes for a Dorito if you’ve got a hankering for Cool Ranch. That’s a moat, and I’d argue it’s a pretty damned good one.

Sure, there are issues. It’s attached to a just okay soda business, although that part of the company is still is solidly profitable. Gas prices are up and aluminum tariffs are a thing. GLP-1 drugs could influence demand, too. My view is these are manageable problems, and analysts tend to agree with me. They expect revenues to creep higher and both earnings and free cash flow to expand over time.

The valuation is also cheap. Pepsi trades at a significant discount to Coca-Cola, which is something that hasn’t really happened much in the last decade. It’s also cheap from a price-to-earnings and dividend yield perspective. I love buying excellent stocks when they’re cheap, and I believe Pepsi checks off both boxes.

I’ve been adding to U.S. stocks lately. Pepsi wasn’t on that list, but I’m still a fan. Especially at the $130 level. I think it’s a terrific long-term opportunity.

Disclosure: Author owns Pepsi shares.