The start of 2025 has been anything but calm for the stock market, especially with tech stocks taking a hit as investors question their high valuations amidst economic uncertainties. However, among the fluctuating tides, there are stable options like Pepsi (PEP), which stands out with its reliable dividend growth. I’m optimistic about Pepsi’s stock because of its appealing dividend yield, a remarkable history of consistent dividend increases, reasonable valuation, and the consistent demand for its products.
Pepsi holds the status of a blue-chip stock, synonymous with reliability and global recognition, making its brand and logo well-known worldwide. Yet, what’s intriguing is that this doesn’t mean it trades at a typical blue-chip premium.
Looking deeper, after a 12.8% drop over the past year, Pepsi’s shares are priced at just 17.8 times the estimated earnings for 2024 and even lower, at 16.9 times for 2025 consensus earnings. This is notably cheaper compared to the broader market with the S&P 500 (SPX) trading at 24.8 times earnings, and even Pepsi’s main competitor, Coca-Cola (KO), is higher at 20.9 times the 2025 earnings estimates.
This affordable valuation provides Pepsi with a solid buffer against market volatility and sets the stage for potential growth in a bullish market scenario, particularly since it has historically traded at higher P/E ratios.
Beyond its valuation, Pepsi stands out as a prime dividend stock. Its dividend yield of 3.7% is particularly alluring, significantly higher than the S&P 500’s 1.3% yield.
Adding to this attractiveness is Pepsi’s unwavering commitment to its dividend. For 52 consecutive years, the company has not only paid but also increased its dividend, earning it a place among the “Dividend Kings.” Other prestigious names in this category include Coca-Cola, Target (TGT), Johnson & Johnson (JNJ), AbbVie (ABBV), and Walmart (WMT).
In a world where few investments offer certainty, owning a Dividend King like Pepsi, which reliably increases its dividend each year, is like setting your financial future on autopilot.
Concerns exist around declining demand for carbonated beverages in developed regions such as the U.S., but Pepsi has strategically positioned itself to mitigate this risk. Carbonated drinks still have growth potential in emerging markets, and Pepsi’s diverse portfolio includes healthier alternatives like Bubly sparkling water and Tazo tea, catering to changing consumer preferences.
Moreover, Pepsi isn’t just a beverage giant. It dominates the savory snacks market, valued at over $250 billion annually, with beloved brands such as Doritos, Cheetos, Lay’s, and Fritos.
Late last year, Pepsi announced its acquisition of the remaining 50% of Sabra, known for hummus, and a $1.2 billion deal for Siete, a tortilla chip maker. These moves underline Pepsi’s intention for sustained growth in the snack segment.
Pepsi is a staple in consumer goods, making products with consistent demand. Even amidst economic challenges, loyal customers often keep Pepsi products in their shopping carts. While consumers might delay major purchases in inflationary times, a pack of Pepsi remains a small, yet steady, part of their budget.
This also applies to Pepsi’s range of snacks and everyday items like Quaker Oats oatmeal.
Turning to analysts, there’s a Moderate Buy consensus for PEP stock, supported by four Buy ratings and three Hold ratings recently. Despite a 9% fall in share price over the year, the average target price of $167.86 per share suggests a potential 13.6% rise.
I’m enthusiastic about Pepsi due to its robust, above-average 3.7% dividend yield and its enduring track record of dividend growth over five decades. In a market characterized by fluctuating trends, such long-term dependability is commendable.
I’m also positive about Pepsi’s stock given its advantageously low valuation, offering substantial downside protection and upside potential, alongside its strong presence in consumer staples with enduring demand. This gives the stock a strong defensive edge.
