PEP Stock To $110?
GERMANY - 2024/12/20: In this photo illustration, Pepsi cans are displayed. (Photo Illustration by ... More Igor Golovniov/SOPA Images/LightRocket via Getty Images)
PepsiCo (NYSE: PEP) recently published its fiscal first-quarter results, demonstrating a mixed performance relative to Wall Street expectations. The company announced revenues of $17.9 billion, slightly surpassing the expected $17.8 billion, though earnings per share (EPS) of $1.48 fell just short of the $1.49 consensus. These results indicate a 2% year-over-year decline in sales and a drop in earnings of 8%, reflecting a challenging beginning to the fiscal year.
Following this announcement, PepsiCo's stock saw a 3% decrease on Thursday, April 24th. This drop seems to be partially driven by a less favorable outlook for the rest of the year. While the company anticipates low single-digit organic revenue growth, it has adjusted its earnings forecast downward to flat year-over-year, a notable change from the previously expected mid-single-digit increase.
An in-depth examination of PepsiCo's organic business performance shows a 2% decline in volume, countered by a 5% rise in pricing. Regionally, the company faced challenges with North American consumer demand but gained from strong international sales growth.
Of course, individual stocks tend to be more volatile than a portfolio – and in the current environment, if you're looking for upside with reduced volatility compared to a single stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and achieved returns of over 91% since its inception.
Apart from PepsiCo's specific earnings, the prevailing macroeconomic climate poses considerable challenges. Escalating economic concerns in the United States, worsened by the current administration's implementation of tariffs, are fostering a negative environment for the broader markets. It is improbable that any major stock, including PepsiCo, will remain completely insulated from these circumstances.
Historically, PepsiCo's stock has shown a certain level of resilience during economic downturns, often outperforming the benchmark S&P 500 index regarding percentage decline. Analyzing recent crises offers important context:
Despite this historical outperformance, the current combination of weak demand and tariff-related uncertainties necessitates careful consideration. PepsiCo's year-to-date stock decline of 7% already highlights investor concerns.
Several elements contribute to the existing cautious outlook:
Considering the 2020 market downturn as a possible reference point, a similar percentage decline (around 30%) from PepsiCo's previous highs this year might drive the stock below $110.
This invites a crucial question for shareholders of PEP stock: If a significant market downturn brings the stock toward or beneath $110, will you uphold your position or feel compelled to sell? Grasping your risk tolerance amidst potential volatility is vital in the current unpredictable economic atmosphere.
Holding on to a declining stock is not always straightforward. Trefis collaborates with Empirical Asset Management, a Boston-based wealth manager whose asset allocation strategies yielded positive returns even during the 2008/2009 period, when the S&P lost over 40%.
Empirical has integrated the Trefis HQ Portfolio in this asset allocation framework to provide clients better returns with less risk versus the benchmark index; offering a smoother ride, as evidenced by HQ Portfolio performance metrics.
While investors hope for a soft landing for the U.S. economy, how severe could the consequences be if another recession occurs? Review the last six market crashes compared.
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Bain Capital Specialty Finance (BCSF) is a diversified BDC that provides a variety of financing solutions to 175 portfolio companies primarily in North America, but also Europe and Australia (a rarity for many BDCs). The lion's share of Bain Capital's investments are first-lien in nature—in addition to 64% exposure directly through portfolio companies, it also has almost 16% more through its investment vehicles. It also deals in equity and preferred equity interest, as well as second-lien and subordinated debt. Unlike CGBD, Bain Capital hasn't exactly lit the industry on fire, but it has caught its stride over the past couple of years. Other reasons to like it? A low cost of debt, a higher-than-average portfolio yield (made even better by its joint ventures), investment-grade debt and an 11% discount to NAV. However I'm nervous about its dividend situation. Dividend coverage has been a strength for the past couple of years, but that could be changing. In 2024, Bain Capital stopped a short streak of dividend hikes and kept its 42-cent regular dividend in place. It instead began paying 3-cent quarterly special dividends, which it has kept up with ever since. That 45 cents quarterly comes out to $1.80 per share in annual dividends. However, analysts expect net investment income to drop from $2.09 per share in 2024 to $1.84 per share this year and $1.82 per share in 2026. That means dividend ratios in the 98%-99% range, which leaves almost no room for error. If BCSF does run into difficulty over the next couple of years, we could see the special dividends reduced or taken away outright—certainly a better look than having to cut a regular dividend, but the practical end result is still less income, even if temporarily. On the other hand, the base-and-special system gives BCSF room to reward us more if Wall Street's expectations prove overly pessimistic. Let's move to another high-yield corner of the market: mortgage real estate investment trusts (mREITs). For the unfamiliar: The typical REIT deals in physical properties—apartments, strip malls, hospitals, casinos. But mortgage REITs deal in 'paper' real estate. They borrow at low short-term rates, lend that cash out in the form of mortgages based on long-term rates, then pocket the difference. If 'long' rates (like those on the 10-year Treasury) are steady or, better yet, declining, that's great news for mREITs. New loans pay less, so their existing loans become more valuable. That's been a mixed bag for mREITs in 2025, which enjoyed declining rates for the first couple months of the year, but have been suffering from a rebound ever since. First up is Two Harbors Investment (TWO), which deals in mortgage servicing rights (MSRs), agency residential mortgage-backed securities (RMBSs) and other financial assets. It also owns an operational platform, RoundPoint Mortgage Servicing LLC, and it has a direct-to-consumer originations business that's still in its early innings. Whenever we see a yield near 20%, it's almost always caused by a sharp decline in share prices. That's very much the case with Two Harbors, whose shares traded in the $60s before collapsing during COVID, only mildly rebounded, then deteriorated ever since to current prices around $10 per share. That action pretty accurately reflected a miserable operating picture: TWO Dividend Ycharts Still, we're talking about a 17%-plus yield. If there's any sort of redeeming value, it's worth looking into. Well, Two Harbors has been working on lowering its debt-to-equity ratio, the company's book value ticked up in the most recent quarter, and it trades at a low 70% of that (still relatively decimated) book value. But all of those positive bullet points have been canceled out by an 8-K filed near the end of May. Two Harbors announced it was taking a $198.9 million charge related to litigation dating back to 2020 against PRCM Advisers, its former external manager. That comes out to roughly $1.90 per share, or 13% of TWO's last reported book value of $14.66 per share. The potential danger is that this significant hit to book value could impact earnings available for distribution (EAD), putting its current dividend rate of 45 cents per share at risk. While the company doesn't report earnings until July, TWO typically announces its dividends in the middle of the month prior to the month in which it reports—so, in this case, we might know by sometime in mid-June. Too much dividend drama. Take Franklin BSP Realty Trust (FBRT), a mortgage REIT dealing in commercial mortgage-backed securities (CMBSs). Multifamily is king here, at more than 70% of the portfolio, but FBRT is happy to take on just about any type of commercial property—it also holds loans in hospitality, industrial, office, retail and other sectors. Virtually all of its portfolio is senior debt, and nearly 90% of that is floating-rate in nature. Collateralized loan obligations are the bulk of its financing sources at a hair over 80%, but Franklin BSP Realty Trust also has 11% exposure to warehouse lending (credit lines extended by banks to originate mortgages), 5% to repurchase agreements (repo), and sprinklings of unsecured debt and asset-specific financing. FBRT shares are down by double digits year-to-date, but now trade at an attractive 28% discount to book and a P/E of around 7 based on 2026 earnings estimates, which is pretty low among mREITs. And there are reasons for optimism—chiefly, the looming July close on the acquisition of NewPoint Holdings JV LLC. The deal to absorb this privately held commercial real estate finance company could set Franklin apart from other commercial mREITs. Again, though, the dividend situation is perhaps shakier than many of us would want. For one, the payout hasn't budged since the company started trading in 2021. Also problematic—real-estate owned (basically, foreclosures) and short-term non-market financing have been dragging on earnings. On the most recent conference call, CFO Jerome Baglien said, 'While we believe in the long-term earning power of the company to cover the dividend, if REO sales slow or volatile market conditions persist, it could be prudent to revisit our dividend in the short term.' There is a little good news: If earnings expectations stay on track, on the other side of FBRT's short-term drag is a path to more solid dividend coverage longer-term. Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: How to Live off Huge Monthly Dividends (up to 8.7%) — Practically Forever. Disclosure: none
