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PepsiCo has a playbook that includes making bolt-on deals to add attractive new brands to its portfolio.
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Over the past year, PepsiCo has brought two new brands into the fold and taken full control of a third.
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PepsiCo is working to accelerate growth, but remains out of favor on Wall Street.
PepsiCo (PEP -0.67%) is a company with more than 50 consecutive annual dividend increases under its belt. You don't achieve a feat like that by accident. It requires having a strong business model that gets executed well in both good times and bad.
PepsiCo's recently announced purchase of Poppi for $1.95 billion is an example of the company's strong business model being executed well during bad times. It makes PepsiCo's stock look like a buy.
PepsiCo is out of favor
PepsiCo's dividend yield is 3.5% at this writing, which is near the highest levels in the company's history. Using dividend yield as a rough gauge of valuation, it appears that Wall Street has put this iconic food and beverage company on the discount rack. That position is backed up by more traditional valuation metrics.
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For example, PepsiCo's price-to-sales (P/S) ratio is currently around 2.3x, while its five-year average P/S ratio is roughly 2.7x. The stock's price-to-earnings ratio is just under 22x, versus a long-term average of nearly 27x. And its price-to-book value ratio is about 11.5x, versus a five-year average of a little more than 13x. Clearly, investors have placed PepsiCo in the valuation doghouse.
This valuation and the company's Dividend King status make it an attractive investment opportunity right now. Indeed, even well-run companies suffer through difficult periods. That's exactly what PepsiCo is doing, since its growth rate slowed after a spike during the post-pandemic period, when inflation allowed it to push through large price increases.
PEP data by YCharts.
PepsiCo is working on its portfolio
To be fair, just being historically cheap isn't the whole story. There's an important secondary condition that speaks to the business model that helped PepsiCo reach Dividend King status. That condition is that PepsiCo's management is working to address its growth challenges in the same way that it has many times before. It is attempting to revitalize its brand portfolio with new blood.
The effort started in 2024. It included management buying the 50% of Sabra, a spread maker, that it didn't already own. It also bought Siete, a diversified Mexican American food maker. Just recently, PepsiCo announced another purchase, this time of Poppi for $1.95 billion. Poppi makes prebiotic soda, which is a growing category in the beverage space.
Poppi is the largest of the three acquisitions. Relative to PepsiCo's $200 billion market cap, none are huge transactions. But they are proof that PepsiCo is taking action. If history is any guide, these moves will help revitalize the company's brand portfolio and get this iconic food maker back on the growth track.
Indeed, all PepsiCo needs to do with Siete and Poppi is plug them into its vast distribution network, and they'll both likely see robust growth. These types of acquisitions by PepsiCo are exactly what a long-term dividend investor should want to see.
Don't wait -- buy while PepsiCo is still out of favor
There's no way to know how long PepsiCo's stock will remain in the dumps. There are real headwinds to deal with, including softness in the company's snack business. But management is clearly working to keep the company at the top of the markets it serves, executing a game plan that has worked year in and year out for decades. Now is the time for long-term dividend investors to buy the stock. If you wait for the business to see better days, the company will still be well run, but the stock probably won't be cheap anymore.
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