PepsiCo (PEP 1.56%) is often considered a resilient stock for long-term investors. It's one of the world's largest beverage and packaged food makers, it consistently buys back its own shares, and it's raised its dividend annually for 52 consecutive years.
But over the past three years, PepsiCo's stock declined 11% as the S&P 500 rose 21%. Let's see why this blue chip stalwart underperformed the market, and if it has a shot at outperforming it again over the next three years.
Image source: Getty Images.
What happened to PepsiCo over the past three years?
PepsiCo's beverage division sells its namesake soda, other carbonated drinks, and a broad range of fruit juices, teas, sports drinks, and bottled water. It also sells packaged foods through its Frito-Lay, Quaker Foods, and Pioneer Foods businesses.
PepsiCo's scale and diversification usually make it a dependable stock. But over the past three years, its growth in net and organic revenues slowed. On a constant currency basis, its core earnings per share (EPS) growth also cooled.
|
Metric |
2022 |
2023 |
2024 |
|---|---|---|---|
|
Net Revenue Growth |
8.7% |
5.9% |
0.4% |
|
Organic Revenue Growth |
14.4% |
9.5% |
2% |
|
Core Gross Margin Growth |
(7 bps) |
101 bps |
72 bps |
|
Core Constant Currency EPS Growth |
11% |
14% |
9% |
|
EPS Growth |
17% |
2% |
6% |
Data source: PepsiCo.
Three major challenges throttled PepsiCo's growth. First, inflation drove it to raise its prices and shrink its packages. Second, it grappled with slower spending and weaker pricing power in China and Latin America, which largely offset the benefits from those price hikes in North America. Lastly, it issued several major recalls, including one for a salmonella outbreak at Quaker Foods and another one for a mass mislabeling of its "zero sugar" beverages.
Quaker's North America unit is now PepsiCo's weakest link. Its organic revenue rose 13% in 2022, but grew just 1% in 2023 and declined 14% in 2024. Without any near-term catalysts, Quaker could continue to struggle over the next few years.
NASDAQ: PEP
Key Data Points
What will happen to PepsiCo over the next three years?
For 2025, PepsiCo expects organic revenue to grow by the low single digits as its core constant currency EPS rises by the mid-single digits. That would be consistent with its growth rates in 2024, which suggests current headwinds will continue.
During its latest conference call in February, CFO Jamie Caulfield said PepsiCo would "continue to invest" in its infrastructure, technology, and automation solutions to get some "momentum back" for its Frito-Lay North America segment, which suffered a 0.5% decline in organic sales in 2024 as it seemingly maxed out pricing power in an inflationary environment.
Caulfield also expects "North America's performance to improve gradually" throughout 2025 as its international business remains "quite resilient and a major contributor" to its overall growth.
As for Quaker, Caulfield believes it still has room to expand by launching new products in the high-protein breakfast market. To stabilize the growth of PepsiCo's North American beverage unit, it plans to "de-emphasize" its weaker and lower-margin brands while buying higher-growth brands like Poppi.
From 2024 to 2027 (on a generally accepted accounting principles (GAAP) basis), analysts expect PepsiCo's revenue to grow at a compound annual growth rate (CAGR) of 3% as its EPS increases at a CAGR of 9%. Those estimates seem stable, but they assume the company can overcome its near-term challenges and won't be hit by more recalls.
Where will PepsiCo's stock be in three years?
Assuming PepsiCo matches analysts' expectations, grows its EPS by another 9% in 2028, and still trades at 19 times forward earnings, its stock could rise 19% to $177 in three years. That would be a decent gain, but it could still probably underperform the S&P 500 -- which has historically delivered average annual returns of more than 10% since its inception.
PepsiCo should keep raising its dividends over the next three years, since it currently has a sustainable trailing payout ratio of 77%, and continue to buy back shares. It should remain a steady investment at these levels, and its high forward yield of 3.6% could attract more income investors as interest rates decline. That said, PepsiCo could continue to underperform the S&P 500 for the foreseeable future -- so it might not be the best consumer staples play for long-term investors.
