The price action in PepsiCo Inc. (NASDAQ: PEP) pulled back from a high recently, but this weakness in the action offers a buying opportunity in a Dividend King. PepsiCo's Q4 results prove the company's strategy continues to work and has what it takes to succeed in today's market: brand strength and pricing power. This combination should propel it to new highs, and the analysts may also help. It has already seen one price target increase since the Q4 results were released; it jumped to $190, a new all-time high.
The analyst sentiment pegs it a "hold," and it has edged lower since the last earnings report. Redburn Partners initiated a "sell," which is out of sync with the rest of the community. The rest of the community views the stock as a firm "hold" verging on "buy" (including some "strong buys") with a price target that trends higher, despite the slipping sentiment.
PepsiCo's Strong Quarter (Despite Headwinds)
PepsiCo had a strong quarter despite some headwinds in the form of exiting the Russia/Ukraine market, divestitures in international business and rising costs in certain segments. Its $28 billion in revenue is up 10.9% versus last year and also beat the MarketBeat.com consensus by 420 basis points. The strength centered on the Frito-Lay North America business grew by 25%, including the impact of a 53rd week. The organic growth rate is still impressive, however, at 18%, and was overshadowed by the Asia, Pacific and China regions. Those regions were deeply impacted by foreign exchange headwinds, however, so offset the reported top-line strength.
The company's margins were impressive, although you have to look past the GAAP results. The GAAP margins took a big hit due to impairments related to SodaStream and other acquisitions, rising costs in overseas business and the cost of exiting certain businesses in Africa. That is offset by adjusted strength which has Q4 earnings up 10% versus last year and came in $0.02 better than expected.
PepsiCo Returns Cash to Shareholders
The results were strong enough that the company increased its dividend growth to double-digits, 10% versus the 7.5% CAGR, which is impressive for a Dividend King. The new payout is worth more than 2.7% to investors and will pay out in June. The company also announced another $1 billion in share repurchases, worth about 0.4% of the market cap following the earnings release. The company's capital return plans are worth $7.7 billion in 2023, or about 85% of net income. At this level, the company should continue raising dividends and buying back shares for years without relying on debt. The company uses debt to enhance returns, but leverage remains very low, near 1.85x equity.
The Technical Outlook
PepsiCo stock has been trending higher for years and strongly higher in the wake of the pandemic. Its moves to improve profitability, diversify its portfolio and expand are paying off; you can see that in the chart. The recent pullback in price action is a textbook entry point for investors, but there are still risks. Resistance at the 150-day EMA or the current all-time high could cap gains. In this scenario, a deeper pullback to firm support could bring the price down to $160 or lower. That move, however, would likely attract new buyers unless there was a fundamental change in the business. More likely, shares of PepsiCo will begin moving higher and drift up to a new all-time high by early spring 2023.
