PepsiCo Stock: Buy, Sell, or Hold?

Consumer-facing companies like PepsiCo (NASDAQ: PEP) are popular with investors because they sell products people routinely use and have straightforward business models that are easy for investors of all experience levels to understand. In PepsiCo's case, simple is lucrative. The stock has outperformed the broader market since the late 1980s.

However, the stock's performance has trailed the S&P 500 over the past 12 months, five years, and 10 years. Has PepsiCo lost its magic, or is the stock poised to bounce back?

Let's review the arguments for whether investors should buy, sell, or hold PepsiCo stock today.

Growth has dominated value for most of the past five years

Many refer to PepsiCo as a value stock . Value stocks are generally mature companies that pay dividends and don't grow as much as they once did. Stock market dynamics could help explain why PepsiCo hasn't performed as well as the S&P 500 in recent years.

Below, you can see how the S&P 500 has outperformed PepsiCo stock in two distinct time frames over the past five years. First, there was 2020-2022, when the Federal Reserve kept interest rates at zero to stimulate the economy during COVID-19. Near-zero-percent interest rates favor growth stocks because money is more freely available, and companies can borrow cheaply.

PEP Total Return Price data by YCharts.

As you might know, this caused a market bubble in riskier assets like growth stocks and cryptocurrencies and led to rampant inflation. The Federal Reserve hiked rates to combat this. Then, artificial intelligence (AI) emerged as an investing trend in early 2023. Once again, investors flocked to technology stocks over companies like PepsiCo so they could ride the AI bandwagon. The performance of the "Magnificent Seven" stocks played a role in carrying the S&P 500 higher while leaving a company like PepsiCo behind.

The stock market cycles between growth and value over time, which is why one investment strategy doesn't always perform better than another. At some point, the pendulum will swing back, and value stocks like PepsiCo will shine again. This is important because one might look at PepsiCo's lagging stock performance over the past several years and assume that something must be wrong with the company itself.

PepsiCo is still a great business today

However, a look at PepsiCo's fundamentals clearly shows a healthy business. The company dominates the aisles at your local grocery store. Most people know PepsiCo for its flagship soda brand, but it owns over 500 product brands, including beverages and snack foods. Its notable brands include Lay's, Aquafina, Gatorade, Mountain Dew, Quaker, Cheetos, Doritos, Tostitos, and more. People eat and drink regardless of the economy, and PepsiCo's strong brand power has helped the company maintain profits despite competition from generics and other name brands.

Want proof? Look no further than PepsiCo's legendary dividend history. It has paid and raised its dividend for 52 consecutive years, a streak spanning recessions, a pandemic, and any other adversity thrown its way over the past five decades. Importantly, PepsiCo has been able to keep raising its dividend because it keeps growing its earnings per share. The company will pay out $5.42 per share in dividends this year, while analysts estimate PepsiCo will earn $8.15 per share. That's only 66% of its earnings.

The company admitted last quarter that some consumers are struggling financially and cutting back on some of their grocery purchases. However, PepsiCo's outlook remains bright. Analysts believe the company will grow earnings by an average of 7% annually for the next three to five years. That's enough growth to continue hiking the dividend, and the share price should follow.

Should investors buy, sell, or hold PepsiCo?

PepsiCo's growth is solid, but not enough that you can pay any price for the stock and expect to make money.

Fortunately, the market's leaning toward growth stocks has left PepsiCo stock at a fair valuation for long-term investors.

PEP PE Ratio data by YCharts.

PepsiCo has traded at an average price-to-earnings (P/E) ratio of nearly 26 for the past decade. You could argue that's a little steep for a company growing earnings at a high single-digit rate, but investors value the company's dependability. The stock's current forward P/E of 21 represents a discount to its average and an opportunity for those who might have hesitated to pay what the stock has commanded in years past.

I would hesitate to call PepsiCo a bargain today. Still, a fairly valued stock means shareholders can reasonably expect PepsiCo's investment returns to resemble its growth. Assuming PepsiCo does grow earnings by 7% annually, the dividend's 3% yield should push annualized returns to around 10%. That won't knock your socks off, but it's enough to generate life-changing wealth when it compounds for decades. Not many companies have the longevity to produce like that. PepsiCo can, which makes the stock a solid buy today.

Justin Pope 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 .