This is Bad News for Pepsi Stock... | Pepsi (PEP) Stock Analysis! |

Pepsi stock continues to be one of the most debated stocks among investors right now. And really, it's been that way over the last couple of years, and it's not hard to see why that's the case. Ultimately, if we jump over to the dividend breakdown sheet and look at Pepsi, what you can see is the stock is yielding over 4%. Which, real quick for reference, if we look here on Seeking Alpha and look at the historical dividend yield, this is the highest dividend yield the company has seen in the last decade. So, keep that in mind. a much higher than normal starting dividend yield. A history of dividend growth over 50 consecutive years of dividend increases with the 10 and 5-year dividend growth rates sitting roughly between 6 and 7%. So, you can see why this immediately catches people's eye from a dividend perspective. And then when you look at the valuation, it's trading at its lowest valuation multiple in the last 5 years. However, if you've been watching the channel for a while now, you know I don't personally own Pepsi in my portfolio. In fact, I've been outspokenly bearish on this stock over the last 3 or so years. And you can see the stock has not done well in the last 5 years, down by about 8%. Now, what's interesting is Pepsi's biggest comparable company is obviously CocaCola. Everybody knows this. And what's interesting is when you look at the historical valuation for these two stocks, we have Pepsi in the orange and then Coca-Cola in the green. Historically, they've traded at relatively similar valuation levels, but starting in around late 2023, early 2024, we started to see a wide divergence in the valuation multiples for these stocks. Pepsi is now trading at a 16.6 PE multiple while Coca-Cola is all the way up to 27 times earnings. That is a huge divergence in the valuation between these two stocks. Is that justified or has Pepsi become a huge opportunity? So again, there's a lot we need to break down in this video. And real quick, like always, if you'd like to be able to download any of the spreadsheets you see in this video and also get access to the Ticker Data add-on in Google Sheets that allows you to automatically import stock financials directly into your spreadsheet, then you can head over to tickerdata.com at the link in the description. So, let's go ahead and talk about Pepsi stock because obviously everything I just said is what most investors entirely base their investment thesis off of. And let me go ahead and tell you that would be a huge mistake. To start, let's break down some of the issues that Pepsi is currently facing. The dividend metrics at first glance do look quite attractive as we just pointed out, but the underlying issue is always capital allocation. It's free cash flow versus dividends paid out. Just as a reminder, I know I say this all the time, but you have to understand capital allocation. How can a company allocate its capital? How can it use its free cash flow? Well, one, it can reinvest back into the business, which ultimately grows free cash flow in the future when done correctly, meaning you can grow dividends in the future. Two, you can either do things like pay down debt, attempt mergers and acquisitions, or four and five, you could buy back shares and pay out dividends. Now, which of those is best completely depends on a multitude of factors. But here's the simple reality. In 2025, Pepsi generated around 7.6 billion in free cash flow, while dividends paid out was also 7.6 billion. So the free cash payout ratio was 99.5%. They essentially used all of their capital to pay out dividends. And it doesn't get much better if we go back just a little bit. Last year the free cash payout ratio wasn't 100%. The year before that a little bit better at 84. But in 2022 it was at 110%. So we now have four consecutive years where essentially dividends are eating up essentially all of the free cash flow. They're using all of their free cash flow to pay out dividends. Now, there's obviously a few different issues with this. To start, jump over to the stock screener and look at Pepsi. One of the things you'll notice is the company has been slightly buying back shares over the last few years. So, right off the bat, we know they're not only paying out dividends using again all of their free cash flow to pay out dividends, but they're also buying back shares. In fact, if we jump over to the recent earnings presentation, start to scroll down. Let's look for the outlook and capital allocation. So right here they're giving their fiscal 2026 guidance and outlook. What they're telling us is total cash returns to shareholders that means dividends plus share buybacks is approximately 8.9 billion. 7.9 billion will be paid out in dividends with share purchases at around 1 billion. So basically they have to generate 8.9 billion in free cash flow to cover all of their cash returns to shareholders. So for reference remember last year they generated around 7.6 6 billion in free cash flow and that's how much they paid out in dividends. So if they're going to return to shareholders 8.9 billion in order to not weaken the balance sheet to take on debt, they need to generate 8.9 billion in free cash flow, which for reference the company has never done before. In fact, free cash flow growth over the past decade is slightly negative. It hasn't gone anywhere, which is obviously very concerning. So really the question we need to be asking above all other questions is can free cash flow start to grow again? Now, it's a very obvious question because that's the question we should be asking for every single stock we analyze, but particularly for Pepsi, strictly from a dividend sustainability perspective, it's a very important question. So, let's go ahead and start to break down a couple of things. If we jump over to the profitability sheet, the easiest way for a company to grow free cash flow is obviously to grow revenues. Now, the data will load in thanks to ticker data, and you can see 5-year revenue growth is actually not too bad. It's sitting at about 6%. However, in particular, the last three years, it's really started to stagnate. We've been sitting in the same range for about three years now. Now, of course, if a company is stagnating revenues, they can still grow free cash flow by expanding their margins. Now, the gross profit margin hasn't expanded, but that's not the best indicator of really what the margins look like. We need to be looking at free cash flow margins, which again we can do by jumping to the free cash flow analysis sheet and looking at Pepsi. Now, before we really dive into these numbers, we need to be thinking about forward-looking projections, which fortunately Pepsi does provide us with. What they tell us is they expect to have a free cash flow conversion ratio of at least 80% in 2026. Free cash flow conversion. What is this telling us? Well, it's telling us what percentage of earnings are directly being translated into free cash flow. So, again, jump back over to the free cash flow analysis sheet. And here's that metric right here. So in 2025 it was 93.11%. They're telling us that in 2026 it'll be at least 80%. So technically it could be a little bit higher but that's quite a bit lower than what we saw in 2025. So that's concerning. Free cash margins are likely to be worse combined with the fact that they're guiding towards organic revenue to increase by just 2 to 4%. Which again is essentially somewhat in line with inflation. So really on a true real revenue growth basis, revenue is not growing at all. So this is concerning. We're not expected to see strong revenue growth. Free cash conversion ratio should be lower. But at the exact same time, they plan to distribute 8.9 billion of capital to shareholders, but free cash flow likely won't be that high. At least I don't see the path forward to hitting that level. So my main concern with Pepsi again is purely capital allocation. People see that high starting dividend yield, the historic dividend growth levels and 50 consecutive years of dividend growth and assume this is a great opportunity, particularly when looking at that PE multiple at a 5 10ear low. But the reality is these are all backwards looking metrics. The issue for this stock is capital allocation. Now, they're doing things like attempting mergers and acquisitions, like with Poppy, for example, to start to spur growth again. But again, that's going to weaken the balance sheet because they're not generating enough free cash flow to pursue these acquisitions because they're using all their free cash flow to pay out dividends. Not to mention, they're currently dealing with a weakening consumer. So, yes, I do have issues with Pepsi stock even at these prices because let me show you what valuation looks like even at these prices. Let's just go ahead and jump over to our stock valuation sheet. We'll jump in and plug in Pepsi. Let's go ahead and jump over to our dividend discount model. And here's my first issue with Pepsi, at least with their valuation right now. Again, we're valuing the stock based on how much they pay out in dividends and how much that dividend will grow in the future. And we've already seen the difficulty they're going to have, not in just growing the dividend, but in simply maintaining the dividend over the next few years without really weakening the balance sheet. So with that in mind, if they grew dividends at about 3%, which to be honest could potentially be generous, even though it's lower than the historical dividend growth rates, their fair value would be around $105, implying 26% downside from current prices. Now, Pepsi is one of those stocks that historically has been viewed as very defensive, and it's definitely AI resistant, which means those are the types of stocks that tend to trade at a premium right now. And I think it's a large part in reason why Coca-Cola is trading at such a premium right now. now as well. Investors are viewing it as a safe haven from an AI bubble. But a lot of the market is starting to wake up to the fact that Pepsi's dividend metrics aren't what they used to be. Their capital allocation is not what it used to be, and even revenue growth in the margins are not what it used to be. That's not to say that things can't turn around. But when you look at this forward-looking guidance and look at it relative to what their capital allocation is currently looking like, you can see even in the next few years, there's still concerns for Pepsi stock. So again, this doesn't mean they can't turn things around, but we always have to look at investments through the lens of a riskto-reward scenario. And right now, the reward is not high enough for me to take on the risk of investing into Pepsi stock. Even at this valuation level, a historically low valuation for Pepsi, I can't make the numbers work for me to consider adding this into my portfolio. So, it's definitely an interesting case study, a stock to have on your watch list, and watch closely with what develops over the next few quarters. But to be honest, I do think my assessment over the last few years has been right. We've seen Pepsi decline and continue to trade in this low range relative to what they were trading at back in 2023 when they were close to $200 a share. So again, go ahead and let me know what you think of Pepsi in the comments down below. And like always, if you'd like to download any of these spreadsheets and get access to the Ticker Data add-on in Google Sheets that allows you to automatically import stock financials directly into your spreadsheet, then you can head over to tickerdata.com at the link in the description. So, with all that being said, thank you guys so much for watching and please don't forget to like and subscribe to the