Pepsico (NASDAQ: PEP) has been lagging behind the broad market since the pandemic bottom but that may be about to change. The company’s performance may be tied to its high valuation, it trades near 24X earnings, but the valuation is well earned and the stock has many attractive qualities for investors. Not only does it pay a market-beating 2.80% dividend yield that comes with a highly-favorable outlook for dividend growth but the company is growing on an organic basis, outperforming its consensus expectations, and offers some safety in a time of market madness.
Pepsico is running with a beta of only 0.57 which makes it about half as volatile as the broad market and volatility in the broad market is on the rise. Pepsico’s beta is also lower than the broader Consumer Staples sector (NYSEARCA: XLP) which makes it a better choice than an index-tracking ETF. The takeaway is that Pepsico is a winning dividend-growth stock in a winning sector with some insulation from the market downturn.
“Our strong results demonstrate that the investments we have made towards becoming an even Faster, even Stronger, and even Better company with pep+ at the center of everything we do are working. We are encouraged by the progress we are making on our strategic agenda, and remain committed to investing in our people, brands, supply chain, and go-to-market systems and winning in the marketplace.”
Pepsico Is Well-Supported By The Sell-Side Market
Pepsico appears to be well-supported by the market due to positive trends in both the analyst's sentiment and the institutional activity. There were a few price target reductions in the weeks ahead of the FQ3 earnings report but that should change now the report is in. Until then, the Marketbeat.com consensus rating is a Moderate Buy with a price target of $184.50 and both are trending higher in the 12, 3, and 1-month comparisons.
As for the Q3 results, they are in line with the long-term investment thesis which is one of organic growth, capital appreciation, and capital returns. The company reported $21.97 billion in net revenue for a gain of 8.8% over last year that beat the consensus estimate by 550 basis points. The strength was driven by growth in all segments led by Quaker, Frito Lay NA, and Latin America and this is despite a 300 basis point FX-related headwind. On an organic basis, sales are up 16% and accompanied by stronger margins as well.
In regard to the earnings and outlook, the company reported a 22% increase in GAAP earnings and a 14% increase in adjusted earnings that were driven by top-line strength, internal efficiency, and share repurchases which are expected to continue into the current quarter and next year. The guidance reflects the Q3 strength, up 2% on the top line with core EPS of $6.73 versus $6.63 prior, and there is room for an upside surprise. Assuming the company’s momentum carries into the 4th quarter sales could easily outpace consensus and set it up fro strength in 2023 as well.
Pepsico On Track For Capital Returns
Pepsico reiterated its guidance for capital returns in F22 which has it on track to raise the dividend next summer. The company says it will pay $7.7 billion in dividends and repurchases and has $344 million or about 0.15% of the market cap left for the fiscal year. The dividend is safe as well, the payout ratio is a bit high at 67% but it is still within acceptable limits for a Dividend King. Competitor The Coca-Cola Company (NYSE: KO) pays a higher yield but also has a higher payout ratio and lower distribution CAGR. The Coca-Cola Company is also running with an identical 0.57 5-year monthly beta but is obviously more volatile than Pepsico in the post-pandemic world. 
