We recently compiled a list of the 7 Best Beverage Stocks that Pay Dividends. In this article, we are going to take a look at where PepsiCo, Inc. (NASDAQ:PEP) stands against the other beverage stocks.
Beverages Market
The food & beverage sector is experiencing significant growth, propelled by a movement towards sustainability and technological advancements. The ready-to-drink beverage market registered a 2% increase in volume in 2023 due to innovations in product mix. Moreover, as businesses adopt environmentally friendly practices and undergo digital transformation, the industry is set for continued development.
The Food and Beverages Global Market Report 2023 indicates that the market is expected to expand at a compound annual growth rate (CAGR) of 6.3% until 2027, underscoring a promising outlook for this vibrant industry.
Persistent inflation and rising interest rates in the recent past have led the industry to grapple with many challenges. This has affected consumer sentiment, driving them toward affordable store brands and quick-service restaurant options. Since 2023, companies have been tackling this situation by passing costs to the consumer; however, any further price increase is going to backfire now demand has become elastic.
Moreover, rising interest rates have also affected beverage makers. Their cost of capital and investment dynamics have been hindered, so companies are leveraging technological solutions, such as automation and data analytics, according to PNC Insights.
However, inflation has fallen to 2.5% in August, prompting improved consumer purchase patterns in packaged goods. According to PMI survey data reported by S&P Global Market Intelligence, global consumer spending growth demonstrated resilience in the second quarter of 2024, driven by an increase in demand for both goods and services. Moreover, the optimism in the strength of the U.S. economy increased to 41%, reflecting greater consumer willingness to spend.
Thus, in 2023, the spirits category maintained its leading position in the beverage sector, surpassing both beer and wine for the second year in a row. As reported in our previous article on best beverage dividend stocks to buy, the revenue increased by 0.2% for U.S. spirits, totaling $37.7 billion, according to the annual economic report from the Distilled Spirits Council of the US (DISCUS). Although this growth is modest, it represents a 0.4% advantage over beer and a significant 26.1% lead over wine sales. Moreover, pre-mixed cocktails emerged as the fastest-growing segment within the spirits category, experiencing a remarkable revenue increase of 26.7%, amounting to $2.8 billion.
Emerging Trends in the Beverage Industry
Like the shifting consumer purchase patterns in other industries, similar trends are also visible in the beverage sector. People are interested in fitness and health and look for nutritious products with lower sugar content. As such, research suggests that 77% of Americans are interested in lower sugar intake in their diets.
The global sugar-free beverage market is expected to reach $38 billion by 2032, exhibiting a CAGR of 7.32%. The main factor behind the demand for healthy beverages is the increase in obesity rates worldwide. Global obesity rates increased from 4.8% in 1990 to 14% in 2022. With the significant rise in overweight and obesity rates, there has been a corresponding increase in consumer interest in sugar-free products, thereby promoting a shift towards healthier alternatives within the food and beverage industry.
Moreover, customers are becoming increasingly concerned about the Corporate Social Responsibility (CSR) of companies when making purchase decisions. Research indicates that 87% of customers are likely to buy products from the companies that work on issues they care about.
Sustainability is becoming increasingly important in the packaging industry, just as it is in other sectors. Reusable packaging can help reduce CO2 emissions by 60%. Hence, this is why beverage brands are adopting this trend. Thus, global sustainable packaging was valued at $228 billion in 2019 and is expected to grow at a CAGR of 5.1% until 2027.
Methodology
To curate the list of best beverage stocks, we scanned Insider Monkey’s database of 912 hedge funds as of Q2 2024 and picked companies that are essentially engaged in the production and distribution of various liquid refreshments, including soft drinks, alcoholic beverages, coffee, tea, bottled water, energy drinks, fruit juices, sports and nutritional drinks, and dairy-based beverages. From that list, we chose seven companies that pay dividends to shareholders and ranked them in ascending order of the number of hedge funds having stakes in them as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close up of a glass of a refreshing carbonated beverage illustrating the company’s different beverages.
PepsiCo, Inc. (NASDAQ:PEP)
Number of Hedge Funds Holders: 65
PepsiCo, Inc. (NASDAQ:PEP) is engaged in the manufacturing, marketing, and sale of multiple beverages and convenient foods worldwide. It also distributes alcoholic beverages, juices, and sparkling water.
PepsiCo, Inc. (NASDAQ:PEP) reported net revenue of $22.5 billion in Q2 2024. This reflected a year-over-year increase of 0.8%. Moreover, the company also delivered an organic revenue growth of 1.9%. The Quaker Foods North American business decreased by 60 basis points as it was majorly impacted by product recalls and subdued sector performance.
Furthermore, the Frito-Lay profit margin declined by 3% in the quarter. This is driven by persistent inflationary pressures and higher borrowing costs which have also made customers more value conscious.
However, PepsiCo Beverages North America delivered 1% organic revenue growth. Moreover, the core operating margin improved for the fourth consecutive quarter. The growth was mainly accelerated by Pepsi and Mountain Dew, as their diet variants with zero sugar performed well. PepsiCo, Inc. (NASDAQ:PEP) reported strong performance in the international business as organic revenue increased by 5.5%. This growth was driven by considerable performance in the Europe and AMESA divisions.
PepsiCo, Inc. (NASDAQ:PEP)’s financial health remained strong with $6.4 billion in cash and equivalents. It is also planning to return $8.2 billion to its shareholders in FY24. The stock saw an increase of 3.33% over the past month. It is one of the best beverage stocks on our list as the company has raised its payouts for 52 years in a row.
In July 2024, PepsiCo, Inc. (NASDAQ:PEP) Europe and Yara partner announced a long-term partnership to decarbonize the food value chain. However, it is experiencing challenges from local soda makers in Muslim-majority countries amidst boycotts.
Despite the unfavorable circumstances, PepsiCo, Inc. (NASDAQ:PEP) has stood its ground with improved international sales. Thus, analysts predict an upside of 4.07% in the share price. Moreover, 65 hedge funds have invested $4.3 billion in the company as of Q2 2024, as per Insider Monkey’s database.
Overall PEP ranks 4th on our list of the best beverage stocks that pay dividends. While we acknowledge the potential of PEP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PEP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
