PepsiCo Stock Just Had Its Best Day in Over 5 Years. Is The Dividend King a No-Brainer Buy Now?

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On July 17th, PepsiCo’s (PEP) stock experienced its most significant one-day increase in more than five years, rising by 7.5%, following the company’s announcement of their Q2 2025 earnings. This positive movement provided a much-needed respite for long-term investors who have been grappling with a prolonged stretch of below-par performance.

Despite the recent rally, I find myself observing that Pepsi still lags behind this year, but interestingly, over the last five years, its stock has inched up by more than 6%. However, this increase doesn’t account for the substantial dividend it offers, which currently stands at about 4%. Remarkably, Pepsi has consistently increased its dividend for an impressive 53 consecutive years. This remarkable feat lands it among the elite group of companies known as Dividend Kings, a title reserved for those who have raised their dividends for at least half a century.

In simple terms, let me summarize the main points from Pepsi’s recent financial report. These insights underscore why this dividend stock is an attractive choice for investors aiming to increase their passive earnings.

The worst may be over for Pepsi

In April of 2025, PepsiCo announced reduced expectations for the entire year after revealing a drop in both revenue and profit during the first quarter. This adjustment was attributed to factors such as inflationary pressures, difficulties in consumer demand, uncertainties regarding geopolitical situations, and complications from tariffs.

Significant issues had been plaguing Pepsi, yet its recent quarter indicated the company seems to be on a promising trajectory.

During the second quarter, Pepsi experienced an advantage due to a weaker U.S. currency, which boosted its foreign exchange earnings. A weak dollar means that money earned in foreign currencies has more purchasing power when converted to dollars for reporting purposes. At the same time, volume declines for Pepsi stabilized, with a 2% decrease in convenient foods and no change in beverage volumes. Beyond its well-known Pepsi brand, the company manages numerous other beverage labels such as Mountain Dew, Gatorade, Tropicana, and Aquafina. It also controls the snack titan Frito-Lay (including Lay’s, Cheetos, Doritos, Fritos, etc.) and Quaker Oats. To broaden its product range and cater to health-conscious consumers, Pepsi has been purchasing a range of snack brands.

In summary, a combination of favorable currency exchange rates and satisfactory business performance allowed Pepsi to reaffirm its forecast for modest yearly organic growth and stable earnings. This is a positive development for a company that had previously been facing negative growth trends.

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Pepsi is revamping its product lineup

Pepsi is effectively prioritizing by pouring resources into popular brands through marketing strategies and tailoring packaging dimensions to offer a wider variety at reduced prices for consumers. During their second-quarter conference call, Pepsi outlined several cost-saving measures globally, such as shutting down two factories to match production with demand, trimming fixed expenses, enhancing their resource management system, controlling travel and expenditures, reevaluating contracts with external partners, and boosting overall efficiency.

I, as an observer, have noticed a significant transformation in Pepsi’s strategy: they are adjusting their beverage and snack offerings to align with the guidelines set by the U.S. Department of Health and Human Services and the U.S. Food and Drug Administration, aiming to phase out synthetic dyes. It seems that Coca-Cola is also joining this movement by opting for cane sugar instead of high-fructose corn syrup. This suggests a widespread industry push to revamp supply chains with a focus on healthier ingredients.

I’ve noticed Pepsi making strategic moves, like acquiring Siete Foods, which seems to be a step towards healthier and more wholesome snacking options. One example is SunChips, a brand under their umbrella, that uses multigrain, and PopCorners, which are baked instead of fried. Interestingly, they already have some brands that align with the current administration’s health initiatives. However, their popular snack brands seem to be lagging behind in this regard.

With the upcoming reintroduction of Frito-Lay’s Simply range, artificial ingredients will be a thing of the past. Starting from Q4 of this year or early next year, Lay’s and Tostitos will return under the Simply label, and there are plans to also relaunch Doritos, Cheetos, and Ruffles in the future. This shift demonstrates Pepsi’s dedication to enhancing its flagship brands and their readiness to update their product lineup to meet evolving consumer demands and regulatory standards.

Pepsi is noticeably discounted from its historical valuation

Despite not having direct influence over economic fluctuations or trade policies, Pepsi is actively working on reducing expenses and making strategic investments for future growth. Currently, the shares offer an appealing 4% dividend return and are undervalued at a low price point.

According to the information provided, Pepsi is anticipating no growth in earnings per share (EPS) for the entire year. Last year, they reported $8.16 in core EPS. Given that Pepsi’s stock price closed at $143.24 on July 18, if they meet their full-year target, their price-to-earnings ratio would be approximately 17.6. This is considered quite affordable for a company that has traditionally been priced higher due to its status as a Dividend King.

Over the past ten years, Pepsi’s stock has typically been valued at a higher price compared to its earnings (P/E ratio of 26.2). This suggests that the stock is generally priced relatively expensively. However, it’s worth noting that Pepsi may not be performing as well as it once did, and therefore might reasonably trade at a lower cost. But the current market valuation appears to be undervaluing Pepsi more than it should.

A passive income powerhouse to buy now

In simpler terms, Pepsi’s second-quarter performance underscored the significant role that investor opinions and stories play in influencing share prices. Despite Pepsi’s fairly average results for this quarter, their stock had taken such a hit that even meeting expectations was considered better than expected.

The cost of a stock may deviate from its underlying value (both rising and falling) because of shifts in investor attitudes or opinions. After the confusion has cleared, it could be asserted that Pepsi remains underpriced compared to its collection of renowned brands spanning various food and drink categories.

Some investors might choose to hold off on purchasing Pepsi stocks until the company demonstrates stronger proof of resuming growth. Yet, it’s worth noting that during this period, the stock’s valuation is exceptionally low and the return yield is substantial.

Investors focusing on value who seek a steady income stream might consider acquiring stocks of the ‘Dividend King’, thus earning while they patiently wait for the company to navigate through its difficulties.

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2025-07-22 21:13