Pepsi Stock: Buy, Sell, or Hold This Dividend King?

What's up everybody? The next dividend investor here. In this episode, I'll break down whether Pepsi's 4 plus percent yield, improving dividend coverage, and 54 year dividend growth streak make the stock a buy today, or whether slowing growth, weak North American volume, and more than 50 billion in debt are warning signs investors shouldn't ignore. Pepsi's obviously a consumer giant selling brand name products in markets around the world. But, is its higher than average yield a gift from the market, or is it warning us that its best growth years are behind it? To help answer that, I'm going to break down the business, the latest earnings, the dividend, the balance sheet, the valuation, and the returns investors could realistically earn from here. Then, I'll tell you whether I consider Pepsi a buy, sell, or hold. And for transparency's sake, it's important to share that I own about 105 grand worth of Pepsi stock in my $4 million dividend portfolio. Feel free to watch my recent videos where I show you all my tickers in Fidelity. And as always, this isn't financial advice cuz I'm just some random guy on the internet, and you have your own goals, financial situation, time horizon, and risk tolerance. Anyway, a guy in my free dividend discord chat server recently shared that he's being considered for a forklift operator position with Pepsi. So, while I'm sitting here wondering if Pepsi stock is worth it, he may be soon getting a much closer look at the business than most of us ever will. I mean, he'll see first hand that Pepsi doesn't just sell soda with its name on it. They also own Mountain Dew, Gatorade, Lay's chips, Doritos, Cheetos, Quaker Oats, Siette Mexican Foods, and a bunch of other brands people often buy. And that's how Pepsi generated about $94 billion in revenue last year, and its products were consumed more than a billion times every single day across more than 200 countries and territories. That's pretty insane, but it adds up if you think about it. It's the Gatorade after a workout, a bag of Lay's in a lunch box, the Doritos during a weekend game, or the Pepsi someone grabs with dinner. Pepsi has the products, the distribution, the shelf space, and just about everything else a company needs to flourish the way it has. And because it owns both beverages and snacks, it gets to reach consumers on both sides of the consumption equation. So, while Coca-Cola, another company I own and one of Pepsi's main competitors, is concentrated almost entirely in beverages, Pepsico has a broader revenue and earnings base across beverages and convenient foods, allowing it to reach more price points and consumer occasions. Bottom line, Pepsi isn't dependent on just one soda brand or even any one category, which gives it many ways to win. Leave me a comment and tell me if you own any Pepsi stock and if you're buying, selling, or holding right now. And if you don't own it, tell me if you ever would. Anyway, even the strongest brands can only raise prices so much before customers start buying less or choosing cheaper alternatives. Pepsi spent several years raising prices to offset inflation and for a while revenue and earnings held up even as actual product volume weakened. Eventually though, consumers started waiting for sales, buying smaller amounts, or even switching to cheaper brands in some cases. I think that tension between price and how much they sell is the most important issue facing Pepsico today because sustainable growth pretty much has to include people buying more products. The latest quarter showed me some progress, but it also showed why investors might not want to assume things are in the clear. Second quarter revenue increased about 6% to 24 billion, while organic revenue increased 2.4%. Core earnings per share increased 4% and year-to-date core EPS increased 6%. Globally, organic sales volume increased 3% for convenient foods and 2% for beverages. Those volume numbers were encouraging because Pepsi had relied heavily on increasing their prices for several years. So, many investors have been waiting to see whether the company could get back to selling more actual products rather than depending mainly on higher prices. But when we look more closely at the North American business, the results become much more mixed. Management said they sold more snacks and reached more households, but lower prices still contributed to a 2% decline in revenue. So, Pepsi appears to be getting some customers back, but it's having to work harder on affordability to make that happen. That may be the right long-term strategy, but lower pricing can pressure revenue and margins before stronger volume makes up the difference. And if you dive into their beverage numbers, then it has some other issues to consider. Specifically, North American beverages grew revenue by 7% but acquisitions contributed about 6 percentage points of that increase. Organic revenue was up just 1% while actual organic volume fell 4%. So, TLDR, people bought fewer drinks from Pepsi's North American beverage business even though reported revenue looked decent. To me, that means after years of price increases, consumers appear to be pushing back. Now, some parts of Pepsi North America look better to me like Gatorade and some of their zero sugar products, but a 4% organic volume decline in Pepsi's home market isn't something I think can be ignored. However, the stronger part of their quarter came from international markets where they achieved 7% organic revenue growth. International beverage volume increased 5% while international convenient food volume increased 4%. That's important because Pepsi already has well-known brands and a strong distribution network in these markets which puts it in a good position to grow as consumers buy more packaged snacks and beverages. Management said about 80% of international revenue comes from developing and emerging markets. That gives Pepsi plenty of room to grow, but it also exposes the company to greater currency political inflation and regulatory risks. Now, one thing that makes the international story more important than it may initially sound is the size and consistency of that business. Pepsi's international operations have now produced at least mid single digit organic revenue growth for 21 consecutive quarters. International markets also represent more than 60% of global beverage volume and approximately 70% of global convenient food volume. So, North American weakness still matters, but it isn't the entire Pepsi story because most of the company's actual product volume already comes from international markets. There's also an accounting detail we need to understand because the headline earnings growth looked far stronger than the underlying result. Reported earnings per share increased 137% during the quarter, but that comparison was heavily affected by impairment charges in the previous year related to the Rockstar and B&G brands. So, without going through all the numbers, I'll just say that Pepsi grew both revenue and adjusted earnings, but didn't deliver the margin improvement that could convince me that more of the problems have been solved. So, like their business is moving forward, but it's still dealing with issues it's got to figure out. That all being said, there are real reasons to believe their strategies are beginning to work. Management said the US salty snack category has returned to volume growth for three consecutive quarters with brands such as Doritos and Ruffles that my family loves. And then portion control multi-packs generate more than 3.5 billion in annual revenue, while more health-focused products such as baked simply SunChips Siete and Quaker Rice Cakes generate around 3 billion and perform well. Beyond that, another positive nod to their strategy is their productivity, where management is using automation, simplification, and supply chain improvements to lower costs and enable more affordability and ultimately innovation. For 2026, Pepsi expects organic revenue growth between 2% and 4% with reported core earnings growth around 5 to 7% after the expected currency benefit. That isn't spectacular, but if earnings grow around 5 or 6% and the valuation remains stable, a starting yield above 4% seems decent to me. Plus, another reason for optimism might come from activist investor Elliott Management, who built a large $4 billion stake in Pepsi. Elliott is known for going into businesses, cutting through the noise, and pushing management to fix operational issues. They're actively pushing Pepsi to streamline its North American supply chain, double down on core brands like Lay's and Doritos, and focus on margin expansion. So, if you're sitting there wondering what's actually going to force management to get North American volume and margins moving in the right direction, Elliott's involvement is a major catalyst that could speed things up. But, there are also things that give me pause. I mean, I think the biggest risk is that North American weakness isn't temporary. Pepsi is spending more on affordability, and that could improve volume, but it may also limit revenue and margin growth. Their beverage business also faces intense competition from Coke, Keurig Dr Pepper, store brands, and newer companies trying to capture the next major trend. And don't forget that Pepsi operates a capital-intensive business with factories warehouses delivery networks, packaging costs, labor expenses, transportation costs, and commodity exposure. So, while their network creates a powerful competitive advantage, it also requires billions of dollars in annual investment with management expecting capital spending around 5% of revenue. And along with changing health preferences, I should also mention new regulations and risks through sugar taxes, labeling requirements, marketing restrictions, and packaging rules. There's also the broader adoption of GLP-1 drugs such as Ozempic and such, which reduce appetite and are already changing how some households spend on food. In fact, a good college friend I play online games with and a close relative of mine are both taking medications that can reduce appetite as a side effect. They don't work exactly the same way as GLP-1s, but I've seen firsthand how both of them are eating and snacking less. So, if smaller portions and reduced snacking becomes permanent habits for a growing number of consumers, those medications could create a persistent drag on snack volume and possibly beverage demand. That reminds me, leave me a comment and tell me if you think GLP-1s like Ozempic are a legitimate long-term threat to companies like Pepsi, or is the market totally overreacting? Anyway, none of that completely destroys the investment case for Pepsi, but it helps explain why its 4-plus percent yield exists as I write this. Though, just because I think it doesn't make it correct. In my experience, great businesses rarely offer unusually attractive dividend yields when everything is going perfectly. And speaking of dividends, let's dive into Pepsi's a bit more. They've paid consecutive quarterly cash dividend since 1965, many years before I was born, and 2026 marked its 54th consecutive annual dividend increase, and they're a sexy dividend king. The current quarterly dividend is $1.48 per share, bringing the annual payout to $5.92 and the starting yield to roughly 4.3% near today's $137 price tag. That's attractive to me, but expectations still need to stay realistic. Pepsi earned core earnings per share of $8.14 [clears throat] in 2025, and the midpoint of management's 2026 guidance would put core earnings at around $8.63. And based on the current annualized dividend, that means Pepsi's paying out roughly 73% of its 2025 core earnings and about 69% of expected 2026 core earnings. That seems manageable, but it isn't especially low, and I'd become more cautious if the expected earnings growth doesn't materialize. It's also why I wouldn't expect annual dividend raises of 8% or 9% unless the core business really speeds up. But there's another side of the payout ratio that doesn't get nearly as much attention. I mean, when we measure the dividend against free cash flow, the historical concern becomes much clearer. Using Pepsi's actual cash dividends paid divided by the company's own definition of free cash flow, the payout ratio was about 82% in 2023, jumped to 96% in 2024, and remained elevated at roughly 93% in 2025. And when you look back over a longer period, you realize this cash flow pressure didn't suddenly appear because of recent inflation. Using that same definition, Pepsi's free cash flow margin declined from about 12.5% in 2015 to roughly 8.7% in 2025. That's a decline of around 30%, which basically means Pepsi is generating less free cash flow from each dollar of revenue than it was a decade ago. And that helps explain why the dividend has recently consumed such a large portion of the company's free cash flow. That part often gets left out, and the question to me is where that payout ratio may be heading. One current set of outside estimates points to the free cash flow payout ratio improving toward the mid-70% range in 2026, and then around 70% in 2027, and the upper 60% range by 2028. Those estimates may calculate free cash flow somewhat differently from Pepsi, so I view the exact percentages as directional rather than directly comparable with the historical ratios I just mentioned. And of course, those estimates aren't guarantees because Pepsi still has to deliver the expected free cash flow recovery while continuing to grow the dividend. Still, if those forecasts are reasonably close, dividend coverage could improve fairly quickly without requiring anything drastic like a dividend cut. That means Pepsi needs stronger cash generation through everything they're trying to do. Pepsi itself is targeting free cash flow conversion of at least 80% of its core net income in 2026 and at least 90% in 2027. That's a different ratio from the dividend payout ratio, but it supports the same basic idea that management expects cash generation to improve. And for perspective, Pepsi generated 8.2 billion of free cash flow in 2025 and paid about 7.6 billion in cash dividends, which is how we arrive at that 93% payout ratio I previously mentioned. Plus, with their dividend hike, management currently expects to pay around 7.9 billion in dividends during 2026. That all being said, if you think a 50-plus year dividend streak makes a stock completely immune to a payout cut, then look at what happened with 3M a while back. I mean, 3M was a beloved dividend king with over 60 straight years of dividend hikes, but after a few years where free cash flow coverage stayed completely stretched, the math eventually caught up to them. They had to chop the dividend. I'm not saying Pepsi's in the exact same boat today, but it's a solid reminder that history doesn't pay the dividend, cash flow does. Anyway, when you add that 7.9 billion in expected dividends to the 1 billion Pepsi plans to spend on share buybacks, total shareholder returns reach roughly 8.9 billion in 2026. Compared with the 8.2 billion of free cash flow Pepsi generated in 2025, that leaves a gap of roughly 700 million bucks. Now, Pepsi has plenty of liquidity and cash flow could improve in 2026, so this doesn't necessarily mean a crisis is brewing, but it does show why the projected free cash flow recovery isn't just a nice-to-have. It's pretty darn important if Pepsi want to fully cover its dividends and buybacks with internally generated cash while keeping debt in check. So, to me, the real bull case isn't simply that the dividend survives. It's that stronger free cash flow creates more breathing room for dividend growth, debt reduction, buybacks, and investment in the business. If free cash flow disappoints and the payout ratio stays near 90% or moves above 100%, then the concern becomes much more serious to me. But if things go as they hope, then maybe we get a 4.3% starting yield along with dividend growth of around 5% and maybe a payout ratio in the upper 60s, then that's a much healthier income story than the backward-looking numbers suggest. And for someone building retirement income, every share begins producing meaningful cash today with a reasonable chance that both the payment and the cash coverage supporting it improve over time. Okay, now let's look at the balance sheet a tad more. At the end of the latest quarter, Pepsi had about 10.6 billion of short-term debt and 42.6 billion of long-term debt, giving it roughly 53.2 billion of total debt. The company held about 10.3 billion in cash and another 465 million in short-term investments. I personally don't see their debt as an immediate threat to the dividend because Pepsi generates billions in annual cash flow and has strong access to credit markets. But it increases interest expense, reduces flexibility, and gives management another reason to keep dividend growth close to earnings growth. Plus, Pepsi authorized a new share repurchase program, allowing it to buy up to 10 billion of stock through February of 2030, giving management flexibility to keep returning capital over the next several years. Now, I'm one of those guys who prefers dividend hikes, but still appreciates share buybacks because every share Pepsi retires reduces the total cost of supporting the dividend while increasing my ownership percentage without me having to buy any more shares myself. Of course, authorizing a buyback doesn't mean Pepsi will spend the full amount and with only about 1 billion of repurchases expected this year, they won't be retiring a significant amount of stock for now. And I actually think that makes sense while their debt remains elevated because I'd rather see Pepsi protect the balance sheet and invest intelligently than borrow or spend too aggressively just to reduce the share count. Now, we get to the part where a great company can still become a disappointing total return investment. I mean, it all comes down to what price we're paying and what kind of return that price leaves us with. So, what are we actually paying for Pepsi and how's the stock performed? Well, when we look at recent performance, Pepsi has clearly lagged behind. Over the last 12 months, Pepsi delivered a negative 1.7% total return, way below the nearly 18% return from the S&P 500 and the roughly 22% return from Coke. Of course, 1 year usually isn't enough time to draw big conclusions around a blue chip stock, so let's look at how Pepsi's performed over the last 5 years. And still we see a crappy return where Pepsi's delivered only about 2% as compared to 80% for the S&P 500 or 67% for Coke. That underperformance is exactly why Pepsi's yield is pushed above 4% while its price has pulled back. That all being said, I've experienced that all quality stocks go through periods where their stock price underperforms. Like Apple fell 30% in late 2018, early 2019 due to a bunch of reasons. Though some investors used that as an opportunity to buy more rather than run and they were richly rewarded. Or think of another stock I own in J&J, a classic dividend play, whose stock was down over a 5-year period from 2020 to 2025, probably due to the talc litigation overhang they had. And after years of its underperformance, it wasn't uncommon to see folks understandably getting frustrated and ultimately selling it, unfortunately missing out on the big rally that J&J recently made. And note, I just saw an announcement that I tweeted out and about how this might finally be the end of their talc stuff as J&J's proposing a $5.5 billion settlement to clear the vast majority of ovarian claims. Still, it needs 95% participation amongst claimants, but to me it might be a huge milestone toward closing this chapter. Inside note, follow me @GenXDividend on X if you don't. And then in another example of a stock that floundered is Microsoft, which I think is one of the strongest companies out there, but its stock still produced a negative total return over roughly the past 2 years. Or think of another ticker I own in SCHD. Now, it's an ETF, but it also went through a long stretch of underperformance and sure enough, videos started coming out slamming it. Then this year it came storming back and outperformed the S&P 500. Does that automatically mean SCHD is worth investing in? No, of course not. My point is that even strong companies and funds can fall out of favor for long stretches of time before sentiment and performance eventually hopefully turn around. Although there's never any guarantee that they will. And when it comes to individual companies, strong businesses usually have talented people who find ways to adapt and keep moving forward when the market throws major challenges at them. And I'm hoping Pepsi's team can do the same. So that's ultimately where your own analysis and conviction matters because you're the one who'll make the decision to either buy, sell, or hold. I plan to keep holding, but that shouldn't influence what you do. I mean, I've made lots of investing mistakes in my lifetime and I'm just being transparent with my thoughts on things. I personally feel that a stock price near 137 bucks, which is what Pepsi's at when I'm working on this, is a fair price for it. Using a midpoint earnings estimate, that means Pepsi trades at roughly 16 times forward core earnings. Of course, a lower valuation does not automatically mean the stock is cheap. That being said, my favorite tool to quickly determine if a stock is expensive or cheap is to use fast graphs, which I'm an affiliate of, and it shows me visually that Pepsi's trading near all-time lows relative to its earnings over the last two decades with the financial crash being a time it was even lower. And using how the market has historically valued it relative to its earnings, this looks like a fair price for Pepsi right now might be about 163 bucks. So is the market simply reflecting a business that once deserved a premium, but now, [clears throat] with its slower growth, is more appropriately priced? That's what you got to figure out. I think a 9% annualized return seems doable, which isn't a guarantee, of course, but I think it's a reasonable estimate based on the yield plus moderate growth. And for a mature consumer staples company, that would be a solid result, especially if most of the return came from growing earnings and cash distributions rather than investors simply paying a higher multiple. Of course, if it does worse than I'd expect and earnings growth slows to 2 or 3%, then its valuation could contract and then I'd guess investors might only earn a mid-single-digit return, perhaps mostly from the dividend. Or in a stronger bull case, like if North American volume rebounds and international growth stays strong and better margins push earnings growth towards, let's say, 7%. Coupled with a 4-plus percent yield might create a real path toward low double-digit annual returns. Now, I wouldn't buy the stock assuming the strongest outcome. I'm discussing on things. I'd think about whether my base case seems accurate and then if it's attractive enough and whether I could emotionally and financially handle the weaker case because we never get certainty, only a range of outcomes and price. So, is Pepsi stock a buy, a sell, or hold? To me at this point, it seems like a cautious buy for some long-term investors and it's a hold for me. I don't think it's an awesome opportunity given everything, but it seems reasonable. I don't expect explosive growth and North American volume, margins, the payout ratio, and debt all deserve some attention, but I believe the current price kind of compensates investors for a reasonable portion of those risks. I mean, you're receiving a yield of around 4.3% a 54-year dividend growth record, a forward valuation near 16 times core earnings, and a realistic path toward moderate growth. And for someone who already owns Pepsi, I don't see a compelling reason to sell simply because growth has slowed amongst other things. I'd continue holding as long as the dividend remains covered, international growth stays healthy, and North American volume gradually improves. And if you're newer to investing and you want to take a position, then you might feel comfortable DCA-ing in rather than investing all at once. Remember, you don't have to predict the exact bottom and you can start small, collect the dividend, and invest more when the valuation and business performance justify to you. So, below 140 bucks, I think Pepsi offers a reasonable balance of income, quality, and potential return. And below 130 bucks, assuming the business outlook hasn't meaningfully deteriorated, I'd see things as more attractive. If the stock moved above 155 bucks without meaningful improvement in earnings and expectations, I'd personally become more cautious. Obviously, Pepsi isn't a perfect company, if there is such a thing, and being a dividend king doesn't make it an automatic buy at any price. But great businesses rarely line up in a neat row and hand you a good yield without giving you a few gray hairs along the way. Market uncertainty is often the toll a patient investors pay to lock in a solid income at a fair valuation. So again, for me, key number I'll be watching over the next several quarters is North American volume. If volume improves without a major sacrifice in pricing or profitability, then my bull case becomes stronger. If Pepsi has to keep lowering prices and sacrificing profit just to stabilize sales volume, then the higher dividend yield may simply reflect the added risk in the business. But again, you got to do your own analysis and ultimately do what makes sense to you, not what Gen X anyone else spews forth in a video. What I do know is that for most of us, wealth isn't built overnight. It's built brick by brick, dividend payment by dividend payment. Now, I'd like to ask you one final question, which is if you'd like me to do more videos like this one, and if so, on which company? Or if you'd like to see some other type of video, then tell me what that would be. Also, if you're on your smartphone, then please hype this video, which is a relatively new thing that YouTube started that helps smaller creators like me get some algorithm love from the viewers. Basically, under a video, you should be able to see a thumbs-up icon, thumbs-down, then some other icons, and finally three dots. If you click on those dots, then a pop-up comes up and eligible videos should have hype as an option, which really helps promote it. Regardless, please hit the thumbs-up button, subscribe if you haven't yet, and click that bell notification. Moving on, next I'd like to show my gratitude to subscribers who left me kind comments, so I'm going to shout out 10 who've done just that. So thanks go out to Fin Free Investing, Edwin B, Warren Hamilton, On My Way to FI, Matthew Guarneri, Tracking a Rat, Jeff Williams Wilson, Nate Wallender, and then multiple from Iron Gram, and multiple from Dizzy Divs. Thanks, folks. I really appreciate it. Next, I'd like to pitch my Seeking Alpha affiliate link, which often has benefits when new people sign up. I'd also like to pitch my Fast Graphs affiliate link along with my coupon code in the description of this video, as using both should allow new subscribers to get 25% off their first payment, even if they sign up for a full year. Also, check out my Patreon page and or consider joining my channel membership, as both have some cool perks you might like. Finally, I'll close this off by recommending that everyone join my freedom discord chat server which has over 11,000 dividend investors on it from 87 countries around the world. [music] Thanks for watching. Stay positive and I'll talk to you again real soon. Remember, I'm not a financial advisor and my videos are for entertainment and inspirational purposes only. Investing of any kind involves risk. I'm only sharing my opinions with no guarantee of gains or loss on investments.