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Reaching Dividend King status requires having a strong business plan and executing it well in good times and bad.
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The consumer staples giant is going through some challenging times.
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An activist investor is partnering with the company to help get it back on a growth trajectory.
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Only a few companies have been able to increase their dividends for 50 consecutive years. Reaching Dividend King status is a remarkable achievement that demonstrates consistency and resilience in the face of adversity.
The Dividend King currently faces some business headwinds, but activist investors can steer the company in the right direction and help shareholders achieve a 20% share price breakout. Here’s the company, and what you need to know before buying.
Pepsi (NASDAQ:PEP) It is the seventh-largest consumer staples company in the world by market capitalization and the second-largest food-related company on the list, behind Coca Cola (NYSE:KO). Coca-Cola is a direct competitor as both companies are giants in the beverage space. However, while Coca-Cola focuses on beverages, PepsiCo is actually one of the most diversified food manufacturers you can buy: It has significant businesses in beverages (including PepsiCo), snacks (including French fries and Lay’s), and packaged foods (including Quaker Oats).
The company’s status as a Dividend King highlights its ability to thrive over the long term. However, even successful companies go through challenging times, and PepsiCo is currently not performing at its best. For example, Coca-Cola’s organic revenue grew 6% in the third quarter (ended September 26), while PepsiCo’s organic revenue grew only 1.3% in the third quarter (ended September 6).
History shows that PepsiCo will eventually get through this. Management is making some moves from its already successful strategy. Specifically, it has been refreshing its brand portfolio through acquisitions and innovating to keep up with changing consumer preferences. This is what strong brand managers do when they need to turn around their business. Over time, PepsiCo and its shareholders could benefit.
In fact, PepsiCo’s stock price is up about 15% in the past six months. Wall Street is already starting to feel that the foundations are being laid to rebuild after a weak patch. However, the stock is still down about 25% from its 2023 highs. Another 20% rise would only take the stock partially back to its highs.
The rally may be driven by PepsiCo’s partnership with activist shareholder Elliott Management. Discussions with Elliott informed the latest strategy update, in which PepsiCo management outlined a plan to accelerate growth. A key component is “careful evaluation of the ensemble model.” Unlike Coca-Cola, which uses bottlers, Pepsi-Cola handles its own bottling. Doing this in-house reduces profit margins, although it increases the company’s control over its distribution system.
Elliott Management has been urging PepsiCo to adopt Coca-Cola’s high-margin strategy. Assuming PepsiCo does this, which is what the management update seems to suggest, it wouldn’t be surprising to see the stock price rise on the news. A price breakout of 20% is a completely reasonable expectation.
There’s a chance, however, that PepsiCo won’t do what Elliott wants. In this case, investors will have to wait for the company’s acquisitions and its innovations to pay off. However, even in this scenario, investors buying the stock today wouldn’t do too badly. PepsiCo’s current dividend yield of 3.8% is near the high end of its historical yield range, so you’ll be well rewarded for waiting.
Elliott Investment Management has a long history of helping businesses regain momentum. PepsiCo appears to be working with the activist investor, not against it. An outsider’s perspective could help management return PepsiCo to growth more quickly, even if it chooses to stick with its current distribution model.
However, if Elliott gets his way, the stock price could rise sharply and quickly. If you’ve been thinking about buying PepsiCo stock, you may want to take action sooner rather than later. The worst-case scenario is that you get an attractive dividend yield while waiting for incremental changes to come to fruition.
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Reuben Gregg Brewer works for PepsiCo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is this stock that has paid dividends for 53 consecutive years about to see a 20% breakout? Originally posted by The Motley Fool