There are industries where demand by consumers is cyclical and dependent on economic conditions. On the other hand, there are industries where buying decisions by consumers are more or less independent from the condition of the economy.

Companies that do not operate in cyclical industries usually perform much better than more cyclical companies during recessions, because they are not as affected by economic downturns.

PepsiCo (PEP) is a company from the consumer staple sector with a very non-cyclical, recession-resilient business. This means that the company does not benefit a lot from economic expansion, but it can provide safe dividends and portfolio stability during economic downturns. For this reason, PepsiCo is a dividend stock worthy of consideration for risk-averse investors.

Company Overview

PepsiCo is one of the largest food and beverages companies in the world. Currently being valued at $190 billion, PepsiCo offers a range of products to its customers, including beverages (Pepsi, Mountain Dew, etc.) and snacks, such as Frito-Lay. The snack business has grown at a faster pace compared to the beverages business over the last couple of years and has turned into the larger of PepsiCo’s business units, now comprising 52% of revenues. PepsiCo has increased its dividend every year for 47 years in a row, which makes the company a Dividend Aristocrat.

PepsiCo’s most recent quarterly results were announced at the beginning of October. The company showcased solid revenue growth of 4.2% year over year, as it brought in $17.2 billion in revenues during the quarter. PepsiCo’s organic growth rate, which backs out currency movements and M&A, was slightly better than that, which shows that PepsiCo is not dependent on acquisitions to drive its growth. Instead, the strong performance from its existing product lines is responsible for the company’s growing revenues.

PepsiCo is not active in a high-growth industry, but through a combination of pricing increases, market-wide growth, and market share gains, PepsiCo has delivered meaningful growth in the past. We believe that this will be the case in the future as well. Like many other US-based consumer-focused companies, PepsiCo should continue to benefit from sales tailwinds in emerging markets. In countries such as India disposable income for many consumers are rising steadily, which allows them to consume an increasing amount of higher-priced branded products from companies such as PepsiCo. Through its large scale PepsiCo has advantages over smaller competitors in delivering its products to a wide range of geographic markets.

The introduction of new products, especially in the healthy foods segment, provides some growth opportunities as well. Consumers who are more health-conscious are willing to pay more for healthier alternatives to products they are consuming already, and with introductions such as its “Better For You” line of products, PepsiCo will continue to benefit from this trend.

The combination of different growth factors that should work in PepsiCo’s favor, combined with the fact that the company was able to grow its earnings-per-share even during the last financial crisis, makes us believe that earnings-per-share growth is very likely for PepsiCo over the coming years. From $5.50 in 2019, PepsiCo should be able to grow its earnings-per-share by at least 5%-6% a year going forward, we believe.

Investor Takeaway

PepsiCo currently offers a dividend yield of 2.8%, which is significantly more than the broad market’s dividend yield of less than 2.0%. Combined with the fact that PepsiCo should be able to grow its dividend meaningfully over the coming years, PepsiCo looks like a solid income investment that combines an above-average yield, reliable dividend growth, and stability during recessions. That said, we believe that PepsiCo’s shares are trading above fair value right now, which is why we would prefer to buy PepsiCo closer to $100 a share.