PepsiCo Faces Challenges, Yet Stock Remains Steady

Despite disappointing results for the third quarter of 2024 reported on October 8, PepsiCo (NASDAQ: PEP) shares saw a modest increase, potentially because investors had anticipated even worse outcomes.

As a significant player in the global food and beverage industry, Pepsi serves as an important indicator in the consumer staples sector. This positions it as a useful measure of consumer spending trends.

Here are the crucial takeaways from Pepsi’s recent results, the earnings call, and what it means for investors considering the dividend stock.

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Pepsi’s Earnings Show Weakness

Pepsi lowered its full-year organic growth estimate from 4% to a “low-single-digit increase,” while maintaining its earnings per share (EPS) forecast at 8%. The company managed to meet the higher end of its earnings target due to effective pricing strategies and various cost-cutting initiatives.

During the earnings call, management emphasized its commitment to long-term growth, even amidst economic difficulties. Notably, on October 1, Pepsi revealed its $1.2 billion acquisition of Siete Foods, aimed at enhancing its multicultural product offerings and improving value for consumers.

Despite reducing its growth guidance, Pepsi reaffirmed its goal to return $8.2 billion to shareholders, which includes $1 billion in stock buybacks and $7.2 billion in dividends. Although disappointing results may concern investors, it is worth noting that Pepsi has maintained its guidance since February, which reflects resilience amid ongoing challenges. In the grand scheme, a slightly lower growth projection may not be critical.

However, a concerning trend emerges as Pepsi continues to report declines in sales volumes across its business. In North America, notable brands such as Frito-Lay, Quaker Foods, and PepsiCo Beverages experienced lower sales in the third quarter compared to the previous year. Overall, volumes for convenience foods and beverages dropped by 2% during the quarter and have continued to decline year-to-date.

As Pepsi grows through acquisitions, organic growth, and stock buybacks, declining sales volumes serve as a red flag. This trend indicates a disconnect between the prices Pepsi sets and the value perceived by consumers, affected by rising competition or alternative products.

Consumer Spending Under Scrutiny

In recent years, Pepsi employed aggressive price increases to counter inflation. However, this approach is losing effectiveness, as highlighted in the earnings call. Executives discussed navigating the ongoing challenges in consumer spending.

Pepsi CFO Jamie Caulfield explained the reduction in sales guidance by noting that recovery among U.S. consumers has been slower than expected, compounded by international geopolitical issues.

Interestingly, consumers appear to be purchasing fewer Pepsi products in each transaction. CEO Ramon Laguarta observed that the pandemic altered consumer behavior, impacting products like multipacks, which were once strong performers.

Mobility patterns and purchasing trends depend on pay periods. As larger multipacks struggle, we are seeing rapid growth in smaller 10-count options. While this shift may lead to reduced overall sales volumes, it could help improve margins.

Current market behaviors echo statements made by Walmart CEO Doug McMillon about differing spending trends between income levels. In challenging economic times, the emphasis on affordability becomes crucial.

While Pepsi’s report hinted at weak consumer demand, the company’s focus on long-term growth strategies suggests they are well-positioned to adapt to these circumstances.

A Steady Dividend Stock

Despite the hurdles faced, Pepsi remains a reliable dividend stock. The company’s management is adeptly addressing controllable factors, making the stock attractive for potential investors. With a projected price-to-earnings ratio of 21.2 based on an EPS guidance of $8.15, Pepsi presents a solid value within the blue-chip category.

With a dividend yield of 3.2% and an impressive history of 52 consecutive years of dividend increases, Pepsi earns the title of Dividend King. The focus on dividends and growth through acquisitions provides a compelling investment case for those who value this strategy.

In summary, despite a challenging economic backdrop, Pepsi continues to be a good candidate for investors looking for stable, income-generating stocks.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.