A High-Yielding Dividend Stock On Sale: Is It Time to Buy?

As the stock market continues to rally, it's becoming a challenge for investors to uncover undervalued gems, with many equities hovering around their highest values. However, opportunities still lurk in corners of the market where certain sectors have been disregarded. One such example is consumer staples, where companies like PepsiCo have seen their appeal diminish due to lukewarm short-term growth forecasts. This has brought PepsiCo's stock price down near its 52-week low, a potential bargain for the astute investor looking for a resilient and shareholder-friendly business to add to their portfolio.

Reasons for the Dip

Recent underwhelming performance of PepsiCo's stock is largely attributed to the company's reduced growth trajectory. After a robust 10% increase in organic sales in 2023, a deceleration ensued, with Q4 seeing only a 4.5% growth, down from 9% in the previous quarter. Management expects this slowdown to persist through fiscal 2024.

Two primary drivers are behind the slower growth: customers are returning to their pre-pandemic shopping behavior, resulting in normalized demand for snacks and beverages, and a decrease in inflation is also constraining sales growth. Consequently, PepsiCo forecasts organic sales growth at around 4% for the year, significantly less than the previous year's rate.

The Silver Lining

Despite the modest growth, PepsiCo's robust business model continues to thrive. The company's earnings surged by 14% last year, surpassing the 10% rise in sales. This indicates not only an increase in sales but an improvement in profit margins as well. For 2024, PepsiCo is honing in on cutting costs and capitalizing on burgeoning segments like energy drinks and sparkling waters, positioning it to elevate earnings by 8% alongside a 4% increase in sales.

Shareholders are also rewarded with consistent and generous cash distributions. With a recently announced 7% increase in its annual dividend—a remarkable 52nd consecutive year of hikes—PepsiCo continues to demonstrate its steadfast commitment to sharing wealth with its investors.

At present, the dividend yield has risen to approximately 3%, a notable uptick from the prior year's 2.3%. Such a committed track record suggests that dividend payments from PepsiCo are set to progress well into the future.

An Opportune Investment Price

Investors seeking immediate income along with the potential for capital appreciation may find PepsiCo's current stock price particularly attractive. The stock is trading about 10% higher than its 52-week low, commanding a valuation of 2.6 times annual sales—a discount compared to historically higher valuations. By contrast, its competitor Coca-Cola trades at roughly 6 times revenue.

While PepsiCo might not match Coca-Cola in profitability, it stands a good chance at bolstering sales and operating profit margins in the coming year. This scenario could play out even if the growth isn't as robust as in recent years.

The combination of a rising dividend and gradual growth signifies a promising opportunity for investors to attain rewarding returns with a strong, albeit currently undervalued, dividend stock such as PepsiCo. Considering its reduced price, now might be the opportune moment to consider investing in PepsiCo shares.

Dividends, Investment, Value