PEP is historically cheap and dividend-safe (B rating); while the speaker does not buy, he views current valuation as attractive for income investors compared to recent years.

PepsiCo stock fell to a 52-week low of $133 this week. Its future- based dividend yield stands at 4.43%. This is the highest yield since 2007, and since PepsiCo has been increasing its dividend for over 50 consecutive years and is known as the Dividend King, I was curious, when was the last time PepsiCo's dividend yield was this high?

The last time Pepsi's dividend yield was this high was in 1984 , during Ronald Reagan's first term. So, this is Pepsi's highest dividend yield in 42 years, and I could tell that others were noticing it, because several members in our community were posting that they were buying PepsiCo this week.

And on paper, PepsiCo looks historically cheap in terms of dividend yield. However, it has historically been cheaper based on earnings multiple and free cash flow multiple.

PepsiCo's payout ratio was 30% in the 1980s, whereas today it is almost 100%. This 92% earnings payout ratio and 99% free cash flow payout ratio have many wondering whether PepsiCo's dividend is sustainable or not.

So today I will discuss in detail the issue of Pepsi achieving the highest dividend yield in the last 42 years. I will review PepsiCo's dividend history and its dividend growth rate.

I will give my opinion on the safety of dividends, the risks of dividend cuts, and whether it could be a dividend yield trap. Finally, I will provide a comprehensive review of PepsiCo's stock trading , explain why the stock price has been underperforming recently, and then give my opinion on the valuation of PepsiCo stock and whether it is a good buy right now.

Okay, so let's take a look at the PepsiCo (Pep ) ticker symbol. The current stock price is $133.66. The stock price has fallen 2% this week, 5% in the past year, and -12.99% in the past 5 years, as it fell again yesterday.

So, if you had bought PepsiCo stock 10 years ago , you would have only made a 26% profit. But if dividends are reinvested, it is much better, i.e. 72%.

Because in the case of dividend-paying stocks like PepsiCo, a large portion of your profits will be dividend reinvestment. But, if you want to buy PepsiCo stock now, you don't need to pay attention to the last 10 years. You should pay attention to today's assessment.

And PepsiCo seems much cheaper today than it did 10 years ago. And remember, over the long term, PepsiCo is a great total return provider in the stock market, with a compound annual growth rate of 12.75%.

This has been possible even despite the poor performance of the last 5 years. This is because they have a dominant business model in the consumer defensive space. Its only competitor is the Coca-Cola Company.

They have a portfolio of high-quality brands across beverages, and they are also diverse in snacks. And it has been a high cash flow generating business for decades. And that's why, they've been a reliable dividend payer , paying quarterly dividends and increasing them annually for over 50 years.

The current expected dividend payout is $ 5.92. At today's price, its dividend yield is 4.43%. In the past 12 months, they have paid $5.81 in dividends. As a result, its dividend yield is 4.34%.

As I mentioned, this is a quarterly dividend paying company, and their next dividend payment date has already passed and is due on September 30, 2026.

But both of these issues are worrisome when it comes to PepsiCo's dividend, which is making people question whether the dividend payout is at risk. Last year, the free cash flow payout ratio was 99% and the net income payout ratio was 92%.

So, I will discuss this in detail and give my opinion on the security of dividends. However, the main reason PepsiCo is popular with dividend investors is its consistency and dividend growth.

Over the past 10 years, the dividend has grown by 96.68%. This is a 7% compound annual growth rate.

However, this growth rate has now started to decline. Over the past 3 years, the dividend has grown by just 17%, which is a compound annual growth rate of 5.37%. And the latest dividend increase was only 4.04%.

We have noticed a slowdown in the rate of dividend growth. And the reason for this is the slowdown in PepsiCo's overall growth rate. Now, I will focus entirely on dividends here, but I will also discuss other financial metrics such as revenue, earnings, free cash flow, operating cash flow, as these help to paint a holistic picture of the stock .

But, many of you watching this video are interested in PepsiCo stock because it's cheap, it's a dividend- paying company, and its yield is currently at its highest in history.

And if you look at the last 5 years, the last 10 years, and since 2007, this is the highest dividend yield you could have bought the stock with. It is in the 100th percentile.

It was close to that for a short time in the summer of 2025, and the stock has been in the cheap range for quite some time over the past year and a half. But incidentally , even in the last 5 years, the average dividend yield at which this stock has traded is 3.03%.

So, anything in the 4% range is historically high.

In fact, for most of the last decade, you could see the stock in the 2% range , especially in 2021 and 2022. PepsiCo stock was trading at a premium. Dividend growth was also high.

So, is this historically high dividend yield a buying opportunity? Well, a big part of it depends on whether it's a yield trap. Is the dividend sustainable at all? Let's discuss this question.

The warning sign here is that the free cash flow payout ratio and earnings payout ratio are currently very high.

PepsiCo's free cash flow payout ratio in 2022 was 110%. In 2024 it was 100% and in 2025 it was 99.6%. This means that they have paid out almost all of their free cash flow as dividends.

Now, in the long term, it probably won't be possible to sustain this. And if a growth opportunity arises where they need to increase their capital expenditure ( CapEx) or they want to make an acquisition without using a lot of debt, the dividend could be at risk , if management decides that this is the better option.

Now, here I would like to mention a few things. First of all, PepsiCo has been in this situation before. Their payout ratio has been very high for quite some time. Part of this was planned.

They are a very mature business and they intentionally pay out a large portion of their profits as dividends , but this dividend payout ratio has increased significantly over the last decade.

To be honest, from 2015 to 2019, they were increasing their dividends at a much higher rate than their free cash flow growth rate. Now, if you look at PepsiCo's dividend payout ratio based on net income, i.e. their GAAP earnings per share, you will see that it has never exceeded 100% in the last 10 years.

In 2017, it was 92 %, and in fiscal year 2025, it was 92.7%.

So, the dividend payout ratio looks historically high and the dividend growth rate is declining. Now, there is also good news to show. I looked at the free cash flow the company generated over the past 12 months.

After all, they have already released their two quarterly reports for fiscal year 2026, and during that time they generated $9.28 billion in free cash flow.

Both their first and second quarters were significantly better than 2025. So, their free cash flow is doing well, and their operating cash flow has also increased over the last 12 months.

They have reduced their capital expenditures (CapEx), which has led to a further increase in free cash flow.

So, let's compare this $9.28 billion in free cash flow over the past 12 months to the dividends they paid during this time. In the last 12 months , that is, in the last year, they have paid out $7.81 billion in dividends.

So, right now as I'm recording this video in fiscal year 2026 , it looks like the free cash flow payout ratio is going for the better, not the worse. It is moving towards an 84% free cash flow payout ratio, at least based on the last 12 months of data.

I would also like to emphasize their 'dividend king' status and the consistency and reliability of this dividend payment; They just raised their dividend by 4% two quarters ago, and their earnings, operating cash flow, and free cash flow are all improving right now.

I wouldn't say that PepsiCo stock is at risk of a dividend cut. I gave it a 'B' safety score. So, if you want to optimize the dividend yield relative to your cost in the case of PepsiCo stock , this seems like a good time to buy.

However, I will shed a little more light on PepsiCo's overall financial position. Let's take a look at Wall Street's price target and current valuation. And we'll also look at whether it's at a discount to its fair value on various financial metrics, what analysts are expecting for PepsiCo stock in the future, and what a possible price projection for the stock could be in the long term.

So, first let's start with earnings. Their next earnings report is scheduled to be released on October 8th. This is the next important date for PepsiCo stock. We will get another update about the company on this day.

But, if we look at the stock's earnings per share, it is $8.55 on a forward-looking basis. This is what analysts expect for the full year of fiscal 2026. Over the past 12 months, their non- GAAP earnings per share were $8.36 and their GAAP earnings per share were $7.63.

So, the forward- looking P/E ratio at this time is 15.63. The previous P ratio was 17.52. And this is undoubtedly a historically low P ratio. In fact, this is the lowest forward- looking P ratio in the last 5 years.

You can see that the median is 21.3. This is the lowest in the last 10 years. The median is 22.07.

And based on non-GAAP earnings per share , this is one of the cheapest times to buy PepsiCo stock in recent decades. And over the long term, PepsiCo stock has grown at a monotonic compound growth rate.

Earnings per share have steadily increased over time. However, the pace of growth is slowing.

In the last 10 years, earnings per share have increased by only 77%. The compound annual growth rate is 6.07%. The 5-year compound annual growth rate is 6.52%. However, consolidated earnings per share have only increased by 11% in the last 3 years.

That is, the compound annual growth rate (CAGR) is 3.98%.

So, PepsiCo is not a high-growth company. And that's why if you buy the stock, you have to buy it cheap. You can't pay extra for this. You can't expect good returns by buying it at a high price.

So, this stock has finally reached a point where it has become a bit cheaper. It is still a very high- quality business that will reliably generate cash for decades to come. PepsiCo will not be disrupted.

Artificial intelligence ( AI) poses no risk to PepsiCo stock. It is a distribution network of beverages and high-quality brands. This company will survive for many decades to come.

But, it will not be a high-growth company. And that's fine, but you have to understand that when a company has low growth, you have to buy it cheap to get a good total return.

So, in the case of PepsiCo, we may be reaching that point. Incidentally, analysts are expecting low-single-digit growth in earnings per share in the coming years. 4.8% growth in 2027, 5.6% growth in 2028 , 1.2% in 2029, and 4.1% in 2030.

So, if you buy PepsiCo stock today, you are buying it at 13 times its 2030 earnings.

So, is this stock a good one to buy today? I'll tell you a few different ways to think about evaluation. First, I'll look at the Fair Value Graph tool, which basically compares historical multiples for PepsiCo stock based on various metrics—such as earnings per share, dividends, free cash flow, operating cash flow, revenue.

We will look at whether the stock is at a discount compared to the historical multiple at which it has traded for that metric. Next, we will perform an intrinsic value calculation for PepsiCo stock.

We will probably look at the Advanced Discounted Cash Flow Calculator and perhaps the Dividend Discount Model as well.

If you are a Pro member , you can also find this fair value graph on each stock's summary page. So, we'll see it there. We'll start with earnings per share. We will look at adjusted earnings per share for the past 12 months.

And right now we have it selected for the last 5 years. We can also look at the past 10 years, and you can see that the lowest multiple during that time was 15.94. We are right around that now at 15.99.

The median P multiple over the last 10 years was 23.02. This is adjusted earnings per share for the past 12 months.

So, if we take this median to be essentially the fair value , the price at which the stock should be trading, then the stock is currently at one of the largest discounts to fair value.

And you can see that during the period from 2019 to 2023, it was trading at a price much higher than its fair value. So, if you are interested in buying PepsiCo stock and have been waiting , now, even though the stock price is in a very bad state psychologically, it is more attractive now than in the good times of 2020 to 2023.

You are buying the same business, in fact it is now a much bigger business. You're getting it at a cheap multiple, at a cheap valuation. Based on trailing 12-month earnings per share , if it returns to 23.02 times, its fair value would be $192, which is 44% higher than today's price.

If we look at the dividend and the trailing 12-month dividend yield , we can see that the yield over the past 10 years has been 2.86% and we are currently trading at one of the largest discounts to that estimated fair value.

If the stock ever starts trading at that price again , its fair value would be $202.97, which would be 51.9% higher than here.

If the stock ever starts trading at that price again, its fair value would be $202.97, which would be 51.9% higher than here. And that's not unusual. Stocks like Coca-Cola and Procter & Gamble trade at this rate.

Again, PepsiCo has historically traded at a price close to this.

If we look at free cash flow , PepsiCo is again within the fair value range. The median price to free cash flow multiple over the past 10 years was 30, indicating a 52.9% upside to fair value.

And even if it goes to a 25 price to free cash flow multiple , that would indicate a 27% upside.

And even if it goes to a 25 price to free cash flow multiple, that would indicate a 27% upside. In terms of operating cash flow, the median multiple over the past year was 18.3.

And again , same thing, it's trading well below its historical multiple. If it goes back to the 18.3 price to operating cash flow multiple , it would indicate a 34.9% upside from here.

If it goes back to the 18.3 price to operating cash flow multiple, it would indicate a 34.9% upside from here. And you will notice how this supposed fair value fluctuates. This is because it is influenced by actual metrics, whether it is operating cash flow or revenue. If it increases, the fair value also increases.

Let's look at the DCF calculator within the Intrinsic Value tool. It is automatically populated with all financial metrics like revenue forecast, capital expenditure (CapEx), unlevered free cash flow.

And basically, at the end of it, you're determining a terminal value, which can either be based on the price to free cash flow multiple of the price you expect the stock to trade at, or you can determine the terminal value by determining a perpetuity growth rate for it.

So, if you do it based on multiples, a lot of it depends on what multiple you think it's worth trading at. That's why I'm giving you the historical context of the price-to-free cash flow multiple the stock has traded at in the past.

If you think it will trade at a multiple of 15, then its intrinsic value would be $113. From here, its price is likely to drop by 15%.

If you think it will trade at a 20 exit multiple, then today's intrinsic value would be $149, which is a potential upside of 11.55% from here.

At 25, this indicates an underlying value of $184. It has a 38% upside from here. There is also a simplified version of this calculator, which is pre-filled with data. You can see the free cash flow growth rate.

If you assume a growth rate of 5.65%, i.e. a 10% discount rate, then its intrinsic value would be $143, which implies a 7% upside from here.

So, you're getting a pretty good margin of safety, and that's based on the trailing 12-month free cash flow per share, $6.80.

There is also the Ben Graham formula for calculating intrinsic value. Here, we are taking the earnings per share for the past 12 months. We are setting a growth rate for earnings per share.

We are remaining conservative with this 5-year CAGR of 5.21%. You're comparing this to the corporate bond rate, 4.4%. This gives an underlying value of $144, indicating an 8% upside.

And then the dividend discount model, which in my opinion is the most conservative way to price a dividend stock. It bases the value of companies entirely on the dividends they pay.

I would say that PepsiCo is a relatively low dividend paying stock when using this type of valuation method.

But, even with this valuation method, assuming a 5% dividend growth rate and a 10% required rate of return at the current future dividend rate, its intrinsic value stands at $119, which is 10% less than here,

but it is undoubtedly one of the cheapest times to buy PepsiCo stock, or at least in modern history.

So, that's my thoughts on PepsiCo stock and its current valuation. And before I end here, I'd like to share with you some of the recent price targets from Wall Street analysts.

Most of this happened after their July earnings report. By the way, this is a 12-month price target for the next year, and most of these are much higher than the current share price.

So, let me know in the comments of the video if you, like some members of dividenddata.com, are buying PepsiCo stock.

Also, if you don't buy it and why, please tell us in the comments. For example, I'm not personally buying PepsiCo stock right now, but I can certainly see the rationale for buying it, especially if you're nearing retirement and want a reliable dividend income.

If you've been keeping an eye on PepsiCo stock for quite some time, it makes much more sense to buy it now than it did a few years ago.