In a market dominated by artificial intelligence growth stocks, PepsiCo is a contrarian pick that could deliver monster gains for patient investors.
Shares of PepsiCo (PEP -0.77%) popped 4.2% on Thursday in response to the company’s third-quarter fiscal 2025 results. The stock continued to climb on Friday despite a brutal sell-off in the S&P 500.
For the quarter, organic revenue increased just 1.3% and core constant-currency earnings per share (EPS) were down 2%. But Pepsi reaffirmed its 2025 financial guidance, which includes low single-digit organic revenue and flat core constant-currency EPS compared to fiscal 2024.
Despite the poor results, investors are optimistic that PepsiCo can turn things around. The company is cutting costs through labor reductions and productivity gains that are expected to continue into the next fiscal year.
Here’s why the company has what it takes to outperform the S&P 500 through 2030, and why it stands out as an excellent dividend stock for value investors to buy now.
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PepsiCo is open to change
On the earnings call, management said that its engagement with Elliott Investment Management, which took a $4 billion stake in PepsiCo, has been “very constructive and collaborative,” especially regarding the company’s plans through 2030. On the earnings call, CEO Ramon Laguarta said that he agreed with Elliott that the stock is undervalued and there are many opportunities to create shareholder value.
Activist investors like Elliott acquire large stakes in companies when they believe they have solutions to challenges. Elliott’s 75-page report praised Pepsi for its international lineup of beverage and snack brands, but criticized the company’s execution and its operations, suggesting a refranchised bottler network.
PepsiCo’s vertically integrated bottling system is significantly different from its peer, Coca-Cola, which relies on a network of around 200 bottling partners worldwide. This structure makes it easier for Coca-Cola to pivot to changes in consumer preferences, economic conditions, and trade policy.
Laguarta said the phrase “sense of urgency” 10 times on the earnings call, aiming to usher in a new era of positive change. For now, these are just promises. Numbers will have to back up these claims.
That being said, PepsiCo’s willingness to work with Elliott on portfolio transformation and cost reductions is a good sign that the company is taking its turnaround seriously and understands investor frustrations.
PepsiCo is responding to consumer demands
On the earnings call, management discussed investments in cost and portfolio transformation, as well as an increased emphasis on wellness and health-conscious consumers. Laguarta said the following in response to an analyst’s question on shifting preferences toward healthier eating:
I think it’s a secular trend as well that consumers will be more making choices based on clean labels, based on the ingredients in the food and not only the taste, but also the type of food that is in the brands. Therefore, some of the relaunches of the brands that we’re making, whether it’s Lay’s or Gatorade or Tostitos, take that into consideration because I think they’re very relevant going forward. Affordability is also a reality. I think when you look at low-income households or middle-income households, they’re very stretched. Fixed costs of living are going up around the world. That will create the need for affordability and value and price points and cost consciousness also for the foreseeable future.
The company is recognizing the need to deliver value for consumers while also revamping its portfolio to cater to wellness trends. This isn’t a new stance, as it recently acquired Sabra and Obela snack and dip products, Mexican-American food brand Siete Foods, and prebiotic soda brand Poppi. All of these brands focus on healthier options and mini-meals rather than heavily processed salty snacks.
Pepsi has market-beating potential
Although quarterly results were poor, the long-term investment thesis is strengthening as Pepsi looks to return to growth. The stock is a great buy for long-term investors who believe the company can turn around.
The stock is dirt cheap, with a forward price-to-earnings ratio of 18 and a dividend yield of 4.1%. The company has increased its dividend for 53 consecutive years, making it a Dividend King and a reliable source of passive income.
On average, the S&P 500 produces an annual total return (including dividends) of 9% to 10%. I think PepsiCo can outperform that total return through 2030 simply by growing earnings by 5% or more. If a stock is a good value (which PepsiCo is), then the stock price should grow at or above the earnings growth rate. If not, the valuation will get even less expensive.
A core part of Elliott’s argument is that Pepsi’s valuation will expand as its growth accelerates and it manages costs. In other words, investors will be willing to pay a high multiple relative to its earnings because the quality of those earnings is increasing. So I could see the company benefiting from better earnings growth and a valuation expansion over the next three to five years. PepsiCo’s dividend alone already accounts for over a third of the total return needed to match the S&P 500 average.
All told, the stock is a no-brainer buy for value and passive income investors.
Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.