PepsiCo(NASDAQ: PEP) kicked off its 2025 reporting year with weak results and cut its full-year guidance -- pushing shares down to a new 52-week low. In fact, Pepsi is down over 24% in the past year and is knocking on the door of a five-year low.
The sell-off has pole-vaulted Pepsi's yield up to 4.1%. And with 53 consecutive years of dividend increases, the beverage and snack giant has an extensive track record of delivering reliable passive income to shareholders.
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Here's why the fizz has evaporated from Pepsi stock and whether the Dividend King is worth buying now.
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Pepsi's dividend is intact despite its guidance cut
Pepsi reported a 1.8% decline in revenue and a 4% decline in constant currency earnings per share (EPS). Constant currency adjusts for changes in currency conversions between reporting periods, making it a more accurate way to measure operating results.
The owner of several beverage brands as well as Frito-Lay and Quaker Oats saw flat beverage volume growth and a 3% decline in convenient foods -- illustrating strain on consumer demand. The opening quote from CEO Ramon Laguarta in Pepsi's earnings release was bleak:
Our businesses remained resilient in the midst of increasingly dynamic and complex geopolitical and macroeconomic conditions in the first quarter. As we look ahead, we expect more volatility and uncertainty, particularly related to global trade developments, which we expect will increase our supply chain costs. At the same time, consumer conditions in many markets remain subdued and similarly have an uncertain outlook.
In 2025, Pepsi is now guiding for a low-single-digit organic revenue increase, $7.6 billion in dividends, and $1 billion in buybacks. It expects flat year-over-year core constant currency EPS compared to prior guidance of mid-single-digit growth. Core EPS excludes restructuring, acquisition, and one-time costs. All told, Pepsi expects 2025 core EPS to decline by 3% compared to previous guidance for a slight increase.
Value is top of mind for consumers
Pepsi attributed three factors to its guidance cut: tariffs, macroeconomic uncertainty, and consumer weakness. On past earnings calls, Pepsi has discussed balancing quantity and price by offering more chips per bag to drive value and boost demand. However, pressure on consumers has intensified. Laguarta said the following on the call:
What we're seeing is that consumers are giving a lot of value to absolute dollars now. So clearly, entry price points and absolute outlay of money per unit is a very important relevant metric. And so, we're putting more emphasis on those entry price points and making sure that we're not asking for a large amount of money for participating in our brands ... that's why smaller, single-serve, smaller multi-packs, those are all tools for us to keep the consumers in the brand.
In sum, tariffs are far from Pepsi's only challenge. Consumer demand continues to deteriorate, which is pressuring Pepsi to make changes just to keep buyers engaged. Pepsi's struggling snack business is relying on single-serve options below the $2 price point. When buyers spend more, they often gravitate toward multipacks. Pepsi has lowered the price of its 10-count multipacks to increase consumer frequency and shift its focus to a price-per-pack mindset.
In other words, if consumers can think of a low cost per pack rather than a higher cost for a larger quantity in a single bag, then it could make the purchase more appealing.
Adjusting to changing consumer preferences
Despite years of challenges and slowing growth, it may come as a surprise that Pepsi has continued to invest in product innovation and acquire new brands. In the last six months, Pepsi has become the sole owner of Sabra and Obela snack and dip products, completed its acquisition of the Mexican-American food brand Siete Foods, and announced its intention to acquire the prebiotic soda brand Poppi.
Together, these acquisitions diversify Pepsi's convenient food and beverage lineup, making it less centered on chips and high-sugar soda, more adaptable to health-conscious consumers, and featuring ready-to-eat meal replacements.
These deals are too small on their own to move the needle in the near term. However, they reveal an element of self-awareness, suggesting that Pepsi is overly reliant on unhealthy snacks and beverages and recognizes the need to diversify to adapt to shifting consumer preferences.
However, Pepsi has been having some noteworthy successes with its core bands. The Pepsi brand has been gaining market share and focusing on the zero-sugar category. Gatorade and Propel have helped Pepsi maintain its leadership in the sports drink category. Pepsi believes it can improve its value chain by optimizing the processes of making, moving, and selling products, which can drive long-term margin growth.
Pepsi's valuation has gone from inexpensive to bargain bin
Tariff turmoil adds another layer of complexity to what has already been a challenging few years for Pepsi. However, Pepsi has simply become too cheap to ignore. A 3% decline implies 2025 core EPS of $7.92 -- giving Pepsi a price-to-earnings ratio based on its core EPS forecast of just 16.8. That's a dirt cheap valuation for a high-yield Dividend King stock.
What's more, Pepsi can continue supporting its capital return program even during this period of slowing growth. The company remains highly profitable, so its challenges are not severe enough to threaten a dividend cut.
However, Pepsi's acquisition spree, paired with slowing growth, has added debt to its balance sheet. Its leverage ratios remain in decent shape, but investors should monitor Pepsi's net debt position to see if it can decrease over time as the company leverages its global supply chain, distribution, and marketing to maximize the benefits of its recently acquired brands.
A reliable income stock that's worth buying and holding
Entering 2025, Pepsi was not at the top of its game. And now that tariffs are expected to add further cost pressure, short-term investors may feel compelled to sell the stock.
Management's lack of enthusiasm for Pepsi's 2025 outlook is palpable, but the stock is simply too cheap to ignore. With expectations down, Pepsi doesn't have to do much to surprise to the upside. In the meantime, the 4.1% dividend yield offers a worthwhile incentive to hold the stock during this period.
Add it all up, and Pepsi stands out as a high-conviction buy for value investors with at least a three to five year investment time horizon to boost their passive income stream.
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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.
