If you've been waiting for the perfect time to buy an under-the-radar dividend stock, you might just be in luck. Many dividend payers are cheaper today thanks to the tech-fueled stock market rally.
Wall Street is also avoiding these businesses due to elevated interest rates, which makes them seem like weaker investments -- at least temporarily.
PepsiCo (PEP -0.23%) is a great example. The snack food and beverage company has been shut out of the market's rally over the past year, dropping 7% in the previous 12 months compared to a 23% spike in the S&P 500. But the business is performing well, even if growth has slowed in recent quarters. Let's look at why you might want to put this dividend standout into your portfolio.
Diversification pays
PepsiCo is known for its rivalry with Coca-Cola (KO 0.12%) because the companies control the world's top soda brands. Yet a PepsiCo investment delivers far more diversification than you get with Coke. More than half of PepsiCo's earnings come from the foods division, which is anchored by snack and breakfast brands like Doritos and Quaker Oats.
That diversification means it can deliver more-stable growth each year, though frequently at a slower overall rate. Organic sales rose by just 3% in the most recent quarter, management announced on April 23. That weak result was mainly due to product recalls that pressured the Quaker Foods unit.
But PepsiCo is still projecting that sales will rise by a decent 4% in 2024 following last year's 10% boost. Coke is forecasting much faster growth with its more-focused portfolio.
Profit margins aren't flat
The company is making the best out of that slower growth environment. Earnings are jumping thanks to the past year's aggressive price increases, cost cuts, and rising demand for products like energy drinks.
Profit per share rose 7% last quarter to easily outpace the company's 3% sales boost. CEO Ramon Laguarta and his team believe earnings will rise by 8% for the full year, or double the projected sales rate.
PEP operating margin (TTM) data by YCharts; TTM = trailing 12 months.
That success might help close the profitability gap with Coke, whose profit margin is roughly double PepsiCo's 14%. Any success in boosting that core profitability metric will likely translate into higher returns for shareholders.
The price, and what to watch
Income investors have a chance to buy the stock at a big discount that reflects Wall Street's bearish short-term outlook. PepsiCo is priced at 2.6 times sales today, down from the premium of over 3 times sales that investors have seen for much of the past few years.
That valuation is close to the lowest available on this stock since the initial phases of the pandemic in early 2020. Coke is priced at over double that premium, for context.
PepsiCo indeed has more-modest growth ambitions in 2024, and its goal of boosting profitability is still speculative at this point. Yet income investors might see that trade-off as a good one to make for this beaten-down consumer staples stock. PepsiCo this year raised its dividend by 7% after boosting it by 10% in 2023. Its track record of over 50 consecutive annual hikes makes it a Dividend King, right along with peer Coca-Cola.
Toss in the prospect of rising profit margins and steady growth in 2024, and you have the ingredients you need for above-average shareholder returns over time.
