Hovering Around a 4-Year Low, Is This High-Yield Dividend King Too Cheap to Ignore?

PepsiCo (NASDAQ: PEP) fell 4.5% on Tuesday after the beverage and snack giant reported fourth-quarter and full-year 2024 results.

Pepsi also announced its 53rd consecutive dividend raise, pole-vaulting its forward dividend yield to 4%. Throw in a mere 20.6 price-to-earnings (P/E) ratio, and Pepsi is a unique Dividend King that combines a track record for dividend raises with a high yield and an inexpensive valuation.

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Here's what's driving the sell-off in Pepsi stock along with the actions management is taking to improve the business -- and whether Pepsi is worth buying now.

Image source: Getty Images.

Ongoing challenges show few signs of improvement

Pepsi's two greatest challenges continue to be declining sales volumes and the impact of unfavorable foreign exchange.

In Q4, sales volumes declined across Pepsi's North American business, including 3% declines in Frito-Lay and PepsiCo Beverages, and a 6% drop in Quaker Foods' sales. Pepsi did better internationally, but foreign exchange headwinds brought down the benefits of Pepsi's international growth.

For the full year, Pepsi saw flat beverage volume growth, 1% lower convenient foods volume, a mere 0.4% increase in revenue, and a 6% increase in earnings per share (EPS) as foreign exchange had a 1.5% impact on net revenue and a 2% impact on EPS.

Guidance for 2025 calls for a low single-digit increase in organic revenue and a mid-single-digit increase in core constant currency EPS. For context, Pepsi grew constant currency EPS by 9% in 2024. If foreign exchange continues to be an issue, core EPS will probably only grow in the low single digits. In other words, Pepsi is forecasting very little growth in 2025, and that's against weak comps from 2024.

Leaning into international and snacks

Pepsi is taking action to return to meaningful growth without overly relying on price increases as it had in years past.

In North America, Pepsi believes it can work toward mid-teens margins in beverages and return to top-line growth. But international expansion is Pepsi's greatest growth aspiration. CEO Ramon Laguarta said the following on the Q4 earnings call:

The international business remains, by far, our largest growth opportunity, and we've been investing consistently over the last 10 years. We'll continue to invest to – continue to nurture this big opportunity for us to develop our caps and continue to build scale business with high margins. To give you a sense today, our international business already almost a $40 billion business, accretive to PepsiCo. So, we build the scale. We build the leverage, and that business continues to grow at a very good pace.

International is already a major aspect of Pepsi's business. In 2024, international made up 40% of sales. Pepsi's biggest growth drivers over the last five years have been Frito-Lay North America and its international segments (excluding Europe).

Frito-Lay North America sales are up 44.9% over the last five years, while Latin America sales are up 54.7%. Asia Pacific, Australia, New Zealand, and China are up 66%, and Africa Middle East, and South Asia are up 70.3%.

In addition to international, Pepsi recognizes the importance of getting Frito-Lay back on track. Laguarta said the following on the Q4 earnings call:

In snacks, after five years of very fast growth and gaining almost 200 bps of share, 2024 has been a slowdown. Our number one priority this year has been stabilizing the category, making sure that consumers come back to the category with good ROI investments. I think we can say that we see that happening. We're seeing the category starting to grow again on volume in the last three months and a little bit of pricing in the category.

Expanding healthy options

On top of a pullback in consumer spending, Pepsi faces longer-term challenges in shifting consumer preferences toward health and taste rather than just taste. Additionally, regulatory pressures could lead to more restrictions on ingredients and labels that display the health risks of harmful ingredients. Recent acquisitions are addressing this challenge.

In January, Pepsi completed its acquisition of Siete Foods for $1.2 billion, boosting its exposure to health-conscious snacks through grain-free and dairy-free options in Mexican-American food. Laguarta said the following on the earnings call:

Away-from-home continues to be an investment area for Frito, something that was in our strategy. Now we're dialing up the opportunity to have our products available away-from-home, but not only in the form of a conventional bag of our snacks, but also more elevated experiences in form of ready-to-eat solutions or mini meal solutions. That's why the acquisitions of Siete and Sabra feed our strategy as they give us not only better-for-you snacks, but also the option to participate in meals and mini-meals in a much more intentional way.

A shift toward healthier snacks is instrumental in Pepsi's growing focus on mini meals. If Pepsi can tap into meal replacements, it could help diversify its revenue stream by accessing a new customer base.

Pepsi is worth buying on the dip

Pepsi is doing a good job of navigating a challenging period by leaning on the strength of its brands. Pepsi could easily cut prices to spur volume growth, but it isn't doing that. In fact, it is making minor price increases in some instances. The company generates plenty of excess cash to fuel organic growth and make acquisitions.

The dividend continues to be an instrumental part of Pepsi's investment thesis. The company announced a 5% dividend raise starting with its June payment, marking a forward yield of 4% based on the stock price at the time of this writing.

All told, Pepsi remains a strong, highly diversified business with capable management that is addressing longer-term shifts in consumer preferences. The stock is worth a closer look for patient investors looking to boost their passive income stream in 2025 and beyond.

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