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Some Pop for Pepsi

11/06/2019 5:00 am EST

Focus: CONSUMER

Charles Carlson

Editor, DRIP Investor

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.

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