Investing opportunity spotlighted with a Dividend King hitting a 52-week low and another reaching a 52-week high, suggesting potential purchases.
Exalted Group of Corporations comprises companies that have consistently paid and escalated their dividends for a minimum of 50 consecutive years. Iconic members include Coca-Cola, Procter & Gamble, and Johnson & Johnson - corporations renowned for their gradual expansion rather than outperforming market returns.
Walmart (WMT 0.39%) has stood out among this distinguished group, boasting a 60.3% year-to-date (YTD) return. Conversely, PepsiCo (PEP -0.58%) is experiencing a rough year, sliding 6.6% YTD, reaching nearly a three-year low. Let's delve into why both blue-chip stocks might be worth considering, irrespective of the reasons.
Walmart, the retail anomaly
Walmart's 2024 performance becomes even more noteworthy when you consider the struggles of its competitors. Discount stores like Dollar General and Dollar Tree are nearing five-year lows. Target has recuperated some of its profit margins but hasn't achieved record-breaking sales and earnings like Walmart.
Walmart has skillfully demonstrated value for customers across various price points. The company continues to cater to customers seeking basics such as household goods and groceries. As discretionary spending has receded, people may opt for purchasing furniture from Walmart instead of Target or Crate & Barrel.
Long-term investments in internal operations, store improvements, and customer experience enhancements are yielding results. Walmart's home delivery service, Walmart+, offers convenience and value to customers.
Walmart anticipates full-year fiscal 2025 consolidated net sales growth of 3.75% to 4.75% and consolidated adjusted operating income growth of 6.5% to 8%. In the face of numerous retailers struggling to offset demand decreases, Walmart is thriving.
Pepsi's descent goes too far
Pepsi's expansion has stalled. Years of price hikes have taken their toll on the food and beverage giant, resulting in declining volumes within Pepsi's beverage division, Pepsi-owned Frito-Lay, and Quaker Oats.
With consumers resisting price increases, it suggests they don't see additional value beyond the current price point. To stimulate demand, Pepsi is turning to promotions and offering more products in specific packaging sizes. Although this strategy could increase sales volume in the short term, it could also negatively impact margins.
Pepsi's stock dropped 4% on Nov. 15 and is now less than 1% away from a 52-week low. In addition to subpar earnings and decelerating growth, Pepsi may also face challenges from a powerful U.S. dollar and policies instated by former President Trump.
The ICE U.S. Dollar Index, which tracks the dollar's strength against a basket of foreign currencies, came close to a 52-week low in late September and then surged to a 52-week high last week. Tariffs and the reshoring of U.S. manufacturing could lead to inflation and an even stronger dollar.
A strong dollar can impact companies that convert sales made outside the U.S. from foreign currencies into dollars.
During the nine months ending Sept. 7, 2024, Pepsi derived 61% of its sales from North America and 67.8% of its operating income. While not as globally oriented as Coke, whose North American segment comprised just 39.3% of consolidated revenue for the nine months ending Sept. 27, 2024, Pepsi is still more globally focused than Walmart.
In fiscal 2024, which ended Jan. 31, 2024, Walmart's international segment accounted for only 17.8% of revenue and 16.8% of operating income. The actual figure is higher because some Sam's Club stores are outside the U.S., but Sam's Club is reported as a separate segment. Nevertheless, Walmart generates the vast majority of its earnings in U.S. dollars and isn't as exposed to tariffs and their impact on costs and supply chains as Pepsi is.
Choosing between value and momentum
Walmart is performing significantly better than Pepsi at the moment, suggesting continued success, while Pepsi's recovery timeline is uncertain. Nevertheless, Pepsi is a more affordable stock compared to Walmart and has a higher yield.
As you can see in the following chart, Pepsi's price-to-earnings (P/E) ratio and forward P/E ratio lie below its historical average, whereas Walmart's P/E and forward P/E are higher than their historical averages.
This discrepancy indicates that investors are generally less optimistic about Pepsi and more optimistic about Walmart, which is understandable given their recent performances.
Similarly, Pepsi's dividend yield is significantly higher than the average of the past decade, whereas Walmart's yield has plummeted below 1%.
Pepsi's yield is higher due to its continued dividend increases, despite a falling stock price, whereas Walmart's stock price has surged more than its dividend growth rate, which has reduced its yield. Walmart, despite being a Dividend King, now offers limited passive income potential, whereas Pepsi remains a strong source of passive income - especially compared to the S&P 500, which yields just 1.3%.
Walmart might be an appealing choice for investors seeking a company that can perform well despite a strong dollar and waning consumer interest. However, for those prioritizing a substantial dividend, Pepsi could be more advantageous. If Walmart’s performance falls short of expectations, it might experience a substantial decline in value, considering its lofty valuation is underpinned by perpetual growth. In contrast, there's already a negative outlook towards Pepsi, which might prompt investors to anticipate below-par results.
The optimal investment decision hinges on your risk appetite, preference between growth and value, and investment objectives, such as a strong focus on long-term earnings or a blend of long-term gains and passive income. For investors seeking balance, both stocks could be worth purchasing at the moment. Investing in an equal share of Walmart and Pepsi yields a 2.1% return - exceeding the S&P 500 average, and offering you a mix of quality and value.
In the context of the given text, here are two sentences that contain the words 'money', 'finance', and 'investing':
Given Walmart's 60.3% year-to-date return and Pepsi's 6.6% decline, finance analysts are exploring investment opportunities in these blue-chip stocks, considering their respective strengths and weaknesses.
For investors interested in income generation, the higher dividend yield of Pepsi compared to Walmart's lower yield might make Pepsi a more attractive option for finance-focused individuals looking to diversify their investment portfolio.
