Why This High-Yield Dividend King Has Plunged 25% and Why You Should Buy It Now

Market uncertainty is high right now thanks to economic and geopolitical issues. Since the start of the year the S&P 500 index (SNPINDEX: ^GSPC) has fallen around 8% or so, but it had fallen by around 15% at one point. Consumer staples stocks have, on average, risen a couple of percentage points. But that's the average; this Dividend King consumer staples giant has fallen roughly 7% this year and is more than 25% below its peak in 2023. Now is the time to step in and buy it. Here's why.

What happened to the Dividend King?

Generally speaking, consumer staples companies sell things that don't cost a lot of money, are effectively life necessities, and that get bought regularly. They are usually viewed as defensive stocks because what they sell gets bought in good economic times and bad, and during bull markets and bear markets. This is why when uncertainty is high in the market, investors tend to buy consumer staples stocks. The relatively strong performance of the sector noted above is an example of these dynamics in action.

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But that's the average. Not all consumer staples companies are performing as well. PepsiCo (NASDAQ: PEP), for example, is down 7% this year and is off more than 25% from its high-water mark in 2023. There are a few problems facing PepsiCo today, with a big one being simple investor perception. The inflation following the coronavirus pandemic allowed the beverage, snack, and packaged food maker to push through large price increases. It can no longer do that and its revenue growth has slowed down. Investors likely got too excited during the good times and may be a bit too negative now, during the less good times.

That's not all of PepsiCo's trouble, however. It is facing a slowdown in its salty snack business, where it is the top player. And there appears to be a societal push toward healthier eating habits across the beverage, snack, and packaged food categories. Both trends are headwinds for PepsiCo, though they will also impact its peers. Still, when you add the top-line issues noted above, the overall picture here isn't great and investors are voting with their feet.

Don't count PepsiCo out

PepsiCo's guidance for 2025 is for low-single-digit organic sales growth and mid-single-digit core earnings-per-share growth. And it also announced a 5% increase in the dividend, which is well above the historical growth rate of inflation. That's dividend increase No. 53 for this Dividend King. If this is what constitutes a bad year, investors should probably be lining up to buy PepsiCo stock -- not selling it.

But sell it they are, and that has pushed the stock's dividend yield up to around 3.8%. That's near the highest levels in PepsiCo's recent history. In fact, the yield is even higher today than it was during the Great Recession. That suggests PepsiCo's stock is cheap.

PEP data by YCharts

This view is backed up by more traditional valuation metrics. The stock's price-to-sales, price-to-earnings, and price-to-book value ratios are all below their five-year averages. Any way you look at it PepsiCo appears to be cheap right now -- despite a long and successful history, highlighted by its status as a Dividend King.

This too shall pass for PepsiCo

Even well-run companies go through hard times, and that's exactly what PepsiCo is dealing with right now. But this is probably an opportunity for dividend investors who think in decades and not days, given the historically cheap valuation of this Dividend King's stock. And it is worth noting that it has been actively using acquisitions to reshape its portfolio, so the groundwork for a rebound is being laid even as the stock continues to flounder. If you don't act soon you may miss your chance to buy PepsiCo at such an attractive price point.

Should you invest $1,000 in PepsiCo right now?

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Reuben Gregg Brewer has positions in PepsiCo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.