Where Will PepsiCo Stock Be in 1 Year? | The Motley Fool (2024)

PepsiCo (PEP -1.68%) posted its fourth-quarter earnings report on Feb. 9. The beverage and packaged food maker's revenue rose 11% year over year to $28.0 billion, and beat analysts' estimates by $1.2 billion. Its organic sales increased 15% as its core EPS climbed 10% on a constant-currency basis to $1.67, which also cleared the consensus forecast by two cents.

For the full year, PepsiCo's revenue rose 9% to $86.4 billion. Its organic sales grew 14% as its core EPS climbed 11% in constant-currency terms. Those rock-solid growth rates made PepsiCo a top safe-haven stock as inflation and rising rates weighed down the broader markets. That's why PepsiCo's stock stayed nearly flat over the past 12 months as the S&P 500 dipped 10%. But can this blue-chip stalwart continue to outperform the market through the end of 2023?

Why does PepsiCo generate such stable growth?

PepsiCo might initially seem like a wobbly long-term investment since soda consumption rates have been steadily dropping over the past two decades as consumers pivoted toward healthier drinks. But PepsiCo doesn't just sell its namesake cola. Its beverage portfolio also includes other brands, including fruit juices, teas, sports drinks, bottled water, and other non-carbonated drinks. It also sells packaged foods through its Frito-Lay, Quaker Foods, and Pioneer Foods subsidiaries.

That broad diversification shielded PepsiCo from the secular decline of the soda market and enabled it to generate stable growth through economic downturns. The following table illustrates how steady PepsiCo's growth remained through the COVID-19 crisis from 2020-2021 and the subsequent inflationary headwinds of 2022.

Data source: PepsiCo. *Constant currency basis.

For 2023, PepsiCo expects its organic sales to rise 6%, and for its core EPS to increase 8% on a constant-currency basis. That confident outlook reinforces PepsiCo's reputation as a safe bear market buy.

What challenges does PepsiCo face?

PepsiCo's biggest near-term challenge is inflation, which has been boosting its commodity costs and supply chain expenses while whittling away the spending power of the average consumer. Inflation also triggered aggressive rate hikes in the U.S., which strengthened the U.S. dollar and curbed PepsiCo's overseas growth with tough currency headwinds.

PepsiCo has been raising its prices to counter those headwinds, but it doesn't plan to implement any more price hikes in 2023. Instead, it expects the resilience of the consumer -- as reflected in the latest wage growth and employment data -- will largely offset that pressure. CFO Hugh Johnston recently told Reuters that the company was in a "real sweet spot" in terms of consumer spending, and that stability should persist throughout 2023.

A longer-term concern is the deterioration of the "junk food" market. However, PepsiCo has been consistently refreshing its classic sodas with zero-sugar versions, smaller serving sizes, and new flavors; promoting healthier drinks like its sparkling water brand Bubly; and launching healthier versions of classic snacks like Lay's potato chips. Those forward-thinking strategies, along with its massive scale and diversification, should preserve its competitive moat.

PepsiCo is making shareholder-friendly moves

PepsiCo is a Dividend King that just raised its dividend for the 51st consecutive year. Its latest 10% hike will boost its annual dividend to $5.06 per share, which can easily be covered by its projected core EPS of $7.20 for 2023. That gives PepsiCo a forward yield of 2.9%, which is only slightly lower than Coca-Cola's (KO -0.47%) forward yield of 3%. PepsiCo also repurchased about a fifth of its shares over the past two decades.

Throughout 2022, PepsiCo returned $7.7 billion to its investors via $6.2 billion in dividends and 1.5 billion in buybacks. In 2023, it plans to return another $7.7 billion to its investors through $6.7 billion in dividends and $1.0 billion in buybacks. Those shareholder-friendly policies should make PepsiCo an attractive investment for conservative long-term investors.

So where will PepsiCo's stock be in a year?

PepsiCo should remain a safe stock to own if the bear market drags on, but its valuations could prevent it from outperforming the S&P 500 if a new bull market starts. At $173 per share, PepsiCo already trades at 24 times its core EPS for 2023. Coca-Cola also trades at 24 times forward earnings. Those multiples are a bit high for consumer staples giants, which usually generate single-digit sales and earnings growth. Their valuations were likely inflated by the flight toward safe haven stocks over the past year, and they could deflate once the macroeconomic situation improves.

I personally don't think the bear market will last until the end of 2023 since inflation has been gradually cooling off. Therefore I fully expect PepsiCo's stock to hold steady over the next 12 months -- but it will likely struggle to outperform the S&P 500 and other higher-growth stocks if investors develop a taste for riskier assets again.