I don't trade very often, and every single time I buy stock, I go in with the idea that I'm going to own it forever. I recently bought PepsiCo (PEP 0.29%) and it has traits that suggest it is a buy-and-hold stock. While I wouldn't recommend buying only a single stock -- it's wise to diversify -- PepsiCo would be a good starting point for just about any investor. Here's what you need to know.
Why buy PepsiCo stock right now?
I tend to focus on historically well-run companies that have fallen on hard times, which are often called "fallen angels." There are no specific criteria, but I like to look for companies that have increased their dividends annually for a very long time. From that list, I single out companies that have historically high dividend yields.
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PepsiCo is a Dividend King with 52 years of annual dividend increases. A business has to be run very well for a very long time to have a dividend streak like that. The dividend yield is currently around 3.4%, which is one of the highest yield rates in the company's history. That hints that the shares are on sale.
Once I've identified a company like PepsiCo, I get to know the business. This is where most companies get tossed from consideration. But not this one.
The company owns the world's largest maker of salty snack foods (Frito-Lay), its second-largest maker of nonalcoholic drinks (Pepsi), and a large packaged food business (Quaker Oats). It has a global brand reach, strong marketing and innovation skills, and the size and financial strength to be an industry consolidator (it just agreed to buy Siete Foods, for example, expanding its reach in the Mexican-American food niche across both its salty snack and packaged food businesses). Simply put, PepsiCo is a good consumer staples company, and companies in this category are known for their resilience in times of economic uncertainty.
Why is PepsiCo on sale right now?
The logic behind my approach is pretty simple: Even great companies go through hard times. The hope is to buy during the hard times and hold as things get better, and it plays out that way more often than not.
PepsiCo's financial results have been a bit weak of late -- at least relative to its strong performance during the early stages of the coronavirus pandemic and the inflationary period it sparked. But management told investors that things might get tougher at the end of 2023, so the 2024 performance slowdown shouldn't be a shock to anyone. Yet the stock is still down about 13% from its 52-week high. That may not sound too bad, but the consumer staples sector is off by only about 3%. Investors are clearly unhappy about PepsiCo's business slowdown.
And yet the company is confident that it will grow earnings by around 7% in 2024. That's pretty good for a "bad" year. The most recent dividend increase, meanwhile, was roughly 7%, roughly twice the historical growth rate of inflation. Most companies don't increase their dividends if they expect to cut them later, and there's nothing in the business to suggest a cut will be necessary. PepsiCo's 66% dividend payout ratio (based on full-year earnings expectations) is a reasonable figure for a large consumer staples maker.
New weight-loss drugs and the potential for stricter food regulation may be concerns for PepsiCo's business. But miracle drugs have a habit of not actually producing enough miracles to change consumer habits (note that two popular new weight loss drugs will now have to carry warnings about the risk of intestinal blockages). And food companies are used to adjusting to regulations. There's no reason to believe PepsiCo won't be able to respond to new circumstances.
PepsiCo: The rewards outweigh the risks
When you step back, PepsiCo isn't hitting on all cylinders right now. But it is still performing fairly well, and the potential challenges seem manageable and/or temporary. Given the stock's historically high yield, I bought it. I think it could be a great stock to own even if you can afford to buy only one stock right now. You can easily build a dividend portfolio around this consumer staples giant as you stuff more cash into your nest egg.
