PepsiCo (PEP) yields over 4% near 52-week lows after North America misses and Citi cuts to Neutral
PepsiCo (PEP) is in focus after Citi downgraded the stock to Neutral from Buy and cut its price target to $145 from $170, a move that came after a Q2 report in which both North American segments missed Street estimates.…
Key takeaways
- Citi downgraded PepsiCo (PEP) to Neutral from Buy and cut its price target to $145 from $170 after both North American segments missed Street estimates in Q2.
- PepsiCo's $5.92 annual dividend yields over 4.2%, roughly three times the S&P 500 rate, with shares near their 52-week lows.
- In Q2, PepsiCo Foods North America organic sales fell 2% while PepsiCo Beverages North America grew just 1%, both below Street expectations.
- Elliott Management disclosed a $4 billion stake last year and pushed for a turnaround, prompting PepsiCo to lower prices, cut about a fifth of its product lineup, and accelerate new launches.
- PEP trades at a 16.3x forward P/E and has raised its dividend for 54 consecutive years.
PepsiCo (PEP) is in focus after Citi downgraded the stock to Neutral from Buy and cut its price target to $145 from $170, a move that came after a Q2 report in which both North American segments missed Street estimates. The $5.92 annual dividend now yields over 4.2%, roughly three times the S&P 500 ($SPX) rate, with shares sitting near their 52-week lows. The next test: whether management's promise of a gradual North America recovery actually shows in the second half.
The Q2 print
PepsiCo's domestic business disappointed on both lines. PepsiCo Foods North America (PFNA) posted a 2% annual decline in organic sales. PepsiCo Beverages North America (PBNA) managed just 1% organic growth. Both came in below what the Street had modeled.
CEO Ramon Laguarta attributed the shortfall to consumers tightening budgets under rising inflationary pressure, with convenience and gas-station channels especially weak as higher gas prices squeezed lower- and middle-income households. CFO Steve Schmitt said the North America business was softer than the company anticipated and guided for a more gradual improvement in performance trends for the rest of the year.
Citi pulled its Buy rating in response, dropping its price target to $145 from $170. That revised target lands below the 23-analyst consensus mean of $155.09 tracked by Barchart. Seven of those analysts carry a Strong Buy. One has a Strong Sell. The remaining 15 sit at Hold or equivalent.
Valuation and the Elliott factor
At a forward price-to-earnings multiple of 16.3x, PEP trades well below both its own historical range and the average S&P 500 constituent. The shares are down 10% over the past five years. Coca-Cola (KO), by comparison, trades about 5% below its 52-week highs and yields roughly 2.4%, less than half of PEP's current rate.
The depressed price attracted Elliott Management, Paul Singer's fund, which disclosed a $4 billion stake last year. Elliott pushed for a turnaround. PepsiCo responded by lowering prices to lift volumes, committing to cut around a fifth of its product lineup, and pledging to accelerate new launches with heavier marketing spend behind them. The tape has not reflected any of that work yet.
What to watch
PEP has raised its dividend for 54 consecutive years. That streak, the 4.2% yield, and a 16.3x forward multiple that already prices in considerable bad news form the income case at current levels. The real setup hinges on whether North America can show sequential improvement before year-end. Citi's $145 target is the current low-end anchor among the major published estimates.