Does PepsiCo Stock Belong in Your Retirement Portfolio?

Advertisement

Retirement stocks are a weird beast, although most investors would look at me and think I’m crazy for saying such a thing. But I think retirement investors have been misled into believing that all blue-chip stocks are “safe,” that the dividends they pay will be enough to keep them happy through retirement and that all will be well.

Pepsico stock (NYSE:PEP) pep stockThe problem is that most blue-chip stocks are wildly overvalued and the dividends aren’t really all that great.

PepsiCo (PEP) stock is one such company often jammed into retirement portfolios, but is that really a good idea?

When we think of PepsiCo stock, we likely think of one thing: soda. For decades, soda has been the easy drink of choice for just about any event. From the days when I was a kid and every party had soda, to today when every party … still has soda, the carbonated beverage has been a staple of both American and global diets for a very long time.

Except, things have been changing. There has been a huge move away from unhealthy food, like soda, and into beverages that are allegedly healthier like water, vitamin water, energy drinks, and so on. From a PR standpoint, PepsiCO stock and its rivals have been under assault from public health, although PepsiCo has been less of a target than Coca-Cola (KO).

As a result, all beverage companies are scrambling to re-invent themselves.

They’ve been reinventing for some time anyway, in order to spur growth, gobbling up beverage brands across the globe. PepsiCo, for example, can rely on its Naked Juice brand to fit the health crazy. It has increased its R&D budgets every year for the past several years.

Outlook for PepsiCo Stock

Make no mistake, soda companies needed to make these changes … soda consumption worldwide fell 1.2% last year.

I’m just not convinced, however, that enough can be done to transform PepsiCo to the point where PepsiCo stock makes sense to buy. As it is, analysts project only 6% EPS growth annually over the next five years — a number likely inflated due to share buybacks. Even assuming that growth rate is correct, and adding in the 3% yield, we’re looking at 9% growth annually. Now that’s just fine … except that PepsiCo stock currently trades at a P/E ratio of 21.

Look, I’ll give PepsiCo stock a 20% premium because of its world-class brand name and the $7 billion or $8 billion in annual free cash flow it generates. PepsiCo isn’t going out of business anytime soon. Still, that means PepsiCo stock is trading at $94 when I’d feel more comfortable with it at $60. That 3% dividend means nothing if the market corrects 20% and takes PepsiCo stock with it.

Could I be wrong? Sure. Over the past 10 years, PepsiCo stock has risen from $54 to $94, paying dividends the whole way — and that includes the financial crisis, when the stock fell from $77 to $48.

I just happen to be a more value-oriented investor. I think if your time horizon is 10 years or longer, you’re probably fine with PepsiCo stock if you own it already. If you don’t own it, you’re better off looking elsewhere.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/pepsico-stock-retirement/.

©2024 InvestorPlace Media, LLC