I seldom make it out of Costco (COST) without dropping $400, or more. That’s because the deals...
Some Pop for Pepsi
11/06/2019 5:00 am EST
One of the best-performing stocks in the Editor’s Portfolio over the last year is PepsiCo (PEP). The beverage and snack food giant is up more than 24%, far outpacing the S&P 500 Index’s 9% return, notes Chuck Carlson, editor of DRIP Investor.
Several factors have fueled these shares:
* The dividend yield of nearly 3% is especially attractive relative to the extremely low interest rates on fixed income investments.
* “Low-volatility” stocks have been in demand, and PepsiCo certainly fits this bill. The stock’s beta is around 0.5, meaning the stock is typically half as volatile as the broad market.
* The company has beaten consensus earnings estimates in each of the last three quarters.
* Organic revenue growth and volume growth have been trending in the right directions.
The stock received an extra boost following the release of third-quarter earnings results. Organic revenue growth of 4.3% was boosted by organic volume growth of 1% in food & snacks and 2% in beverages.
The company now expects its full-year organic revenue growth to meet or exceed its target of 4%. The quarter saw revenue growth across all business segments and geographies. Frito-Lay North America was especially strong with revenue growth of 5.5%.
The performance of the North America beverages unit was encouraging, with the firm showing 3% organic revenue growth. Improvement in the company’s Gatorade brand, including the success of Gatorade Zero , was an especially positive development.
PepsiCo has good momentum heading into the end of the year, and I would suspect these shares will continue to outperform the market in the short run. I am getting a little concerned, however, by valuation.
The shares currently trade at a price-earnings multiple of 23 based on fiscal 2020 earnings estimate of nearly $6 per share. That is not an outlandish valuation, but it is getting a little salty.
Thus, the shares are vulnerable to a rotational correction in the market, one where investors move out of more defensive stocks and into value and cyclical issues that have lagged.
I have been a long-time owner of PepsiCo — the stock has been in the Editor’s Portfolio since the first issue of DRIP Investor in August, 1992 — and have been quite pleased with the long-term returns of these shares.
While I wouldn’t be surprised if the stock consolidated its gains in 2020, I remain bullish on the company’s operations, especially with improved operating momentum in its beverage business and plenty of runway for growth overseas.
Please note PepsiCo offers a direct purchase plan whereby any investor may buy the first share and every share directly from the company.
Related Articles on CONSUMER
Like many consumer goods producers, companies that make apparel have experienced sharply lower sales...
The Coca-Cola Company (KO) is a stock and brand that almost everyone knows; it is also a favorite of...
Casino and resort operator MGM Resorts International (MGM), an S&P 500 global entertainment comp...