PepsiCo (PEP) has fallen on hard times. As consumer habits and tastes change towards more healthy options, its sales growth has slowed and it's showing up in the stock price.
PEP stock is down 12% year-to-date compared to a 6% decline by the S&P 500 and it's off 22% over the past year at $133 per share. Pepsi hasn't traded this low since early 2021 and it doesn't look like it will make a u-turn anytime soon.
Yet it has raised its dividend for 53 consecutive years, most recently by 5%, making it a Dividend King. With a long history of making payments to shareholders, is PEP stock a buy for income investors looking for the beverage giant to make a turnaround?
Pepsi realizes it has a problem. In its last earnings conference call, CEO Ramon Luis Laguarta told analysts the company's problems stem from "all the conversation around obesity drugs, but also other conversations that are happening around the space on health and wellness."
Last month Pepsi announced it was buying Poppi, a prebiotic soda brand, for $1.95 billion. It's a healthier soda brand that has found a niche to tap into with consumers. Sales in 2023 more than doubled to $100 million, which followed 148% growth in 2022. According to Forbes, Poppi's sales skyrocketed last year to over $500 million and it is even stealing market share from the soda giants.
It follows Coca-Cola (KO) launching its own prebiotic soda brand Simply Pop earlier
this year. Interestingly, KO stock has performed markedly better than Pepsi. It's up 15% in 2025 and 18% over the last 12 months.
The difference between them is Coca-Cola is purely a beverage company while Pepsi also has a snacks business, which is its largest segment representing 33% of total revenue. First-quarter food sales were down 1.5% to $6.17 billion.
The Poppi acquisition could help inject a much-needed revenue boost to Pepsi's beverage segment, which had flat revenue in Q1. Because of the dramatic growth Poppi is apparently experiencing, the near-$2 billion purchase price is worthwhile.
Yet PEP's dividend, while not in danger, is no longer as strong as it once was. The just-announced hike is respectable for a mature business and it is in line with 7% compound annual growth rate over the last decade, but last year Pepsi actually spent more on its dividend than in the free cash flow it generated.
While its balance sheet is strong enough to maintain that for a period, it is not a sustainable trend. Further, its three-year FCF is only around 1% growth, down from almost 6% over the last five years, so FCF generation has slowed considerably. That's mirrored PEP's revenue growth rate decline, which is why the Poppi acquisition is so important and why it must get it right.
PEP stock trades at under 20 times earnings, below its 10-year average of 25, but warranted because of the sales growth slowdown.
So is PEP stock a buy? It depends. For a patient income investor willing to collect the 4% yield and wait for a turnaround, the discount Pepsi offers isn't bad, but I wouldn't back up the truck. As a dividend growth investor looking for businesses with rising revenue and cash profits, I think there are better opportunities available.
