PepsiCo: A Bitter Draught of Redemption

by

Let us rewind, if you will, to May of last year. A time when the market, in its capricious mood, had cast PepsiCo (PEP +1.39%) into a shadow of doubt. The stock, hovering near a four-year low, bore the weight of stagnant growth and the collective anxieties of a consumer base increasingly preoccupied with…well, with their own mortality, perhaps? It was a company adrift, a leviathan seemingly incapable of adapting to the currents of health consciousness. A curious spectacle, wasn’t it?

Everything, it seemed, conspired against Pepsi. A decline in price, coupled with over half a century of dividend payments – a testament to consistency, or perhaps a gilded cage of expectation? – had inflated the yield to 4.4%. The herd, predictably, panicked. But I dared to look deeper, to see not a failing enterprise, but a slumbering giant. The market, you see, often mistakes inertia for impotence. It underestimates the power of a brand, the enduring appeal of…comfort. And, crucially, it forgets that even the most established behemoths can, with a sufficient exertion of will, reinvent themselves.

Pepsi did, indeed, rebound from those spring lows, though a modest decline of 5.6% for the year remained a lingering bruise. But 2026…ah, 2026 has been a revelation. A staggering 18.8% ascent! The consumer staples sector, and even its rival, Coca-Cola (KO +2.44%), have managed a respectable climb of around 13%, while the broader S&P 500 (^GSPC +0.00%) merely crawls forward at a snail’s pace of 1.3%. Pepsi has transformed from a pariah to one of the market’s darlings. But is this euphoria justified? Or are we witnessing a collective delusion, a temporary suspension of disbelief before the inevitable fall?

A Quarter of Reckoning

The fourth-quarter report, delivered on February 3rd, was…remarkable. Accelerated sales growth, expanding operating margins, and a surge in earnings per share. North America, admittedly, remains a stubborn challenge, but the company’s success in Europe, the Middle East, Africa, and Latin America speaks volumes about the resilience of its global supply chain and the effectiveness of its marketing – a subtle manipulation of desire, wouldn’t you say?

Pepsi cautiously projects organic revenue growth of only 2% to 4% and constant-currency EPS growth of 4% to 6% for fiscal 2026. A modest ambition, perhaps, but enough to appease the insatiable appetite of investors. They seem content to ignore the underlying fragility of the economic landscape, to bask in the glow of short-term gains. The company, meanwhile, continues to return capital to shareholders, a gesture of appeasement, a distraction from the deeper questions.

The dividend increase – 5%, marking its 53rd consecutive annual rise – is a ritual, a performance of stability in a world consumed by chaos. It maintains Pepsi’s status as a Dividend King, a member of an exclusive club of companies that have consistently rewarded their shareholders for over half a century. A comforting thought, isn’t it? But what does such consistency truly signify? A genuine commitment to long-term value creation, or merely a desperate attempt to cling to the past?

And then, another dividend increase announced with the latest earnings report, boosting the annualized payout to $5.92. A staggering $7.9 billion in dividends expected for fiscal 2026. Coupled with a $10 billion stock buyback program extending through February 28, 2030, including $1 billion in buybacks for the current fiscal year. A lavish display of wealth, a calculated attempt to manipulate the market’s perception. But such gestures, however impressive, cannot mask the underlying anxieties.

The forward dividend yield, now at 3.5%, has, predictably, declined as the stock price has soared. A logical consequence, of course. A company’s yield will fall if its stock price outpaces its dividend growth. This was precisely the argument I put forth last May, when I predicted the peak of Pepsi’s yield. The market, alas, rarely listens to reason.

Loading widget...

The Illusion of Salvation

Pepsi’s ascent is fueled not only by broader sector rallies and strong international results but also by a growing confidence in its ability to generate free cash flow and return capital to shareholders. A virtuous cycle, perhaps? Or a dangerous addiction to short-term gratification?

Recent acquisitions – Siete Foods, Poppi, and the full ownership of Sabra and Obela – promise to improve Pepsi’s results in the coming months. A strategic move, certainly, but will these ventures truly transform the company? Or are they merely cosmetic enhancements, designed to distract from the fundamental challenges?

Even after this remarkable run-up, Pepsi trades at 19.8 times forward earnings, a noteworthy discount to Coke’s 24.5 times. A relative bargain, perhaps? Pepsi is no longer as cheap as it once was, but it still offers value for dividend investors. A fleeting opportunity, or a genuine investment for the long term? The question, as always, remains unanswered.

Read More

2026-02-12 00:14