PepsiCo (PEP) used to be the stock you bought and forgot. Now it sits about a third below its 2023 peak. It trades at its widest discount to Coca-Cola (KO) in more than 25 years. David Wainer at the Journal's Heard on the Street says the time for small fixes has passed.
The latest quarter explains the mood. Snack volumes edged up, but the snack unit's operating profit fell 13%. Drink volumes fell 2%. Pepsi cut its profit outlook for the second time this year. “We're not competing well in soft drinks,” CEO Ramon Laguarta told analysts. He has run the company since 2018. Many investors now ask whether he's the right person for the job.
The KFC loss we covered Oct. 16 has a backstory now. Monday's Page One tells it. In June, Coke and Pepsi each got a day in a Yum Brands meeting room in Plano, Texas. Each had about two hours to pitch. KFC executives and franchisees tasted samples from both. Both bids looked fine on the numbers, a person familiar with the talks said. Coke stood out for its promise of future sales growth. The prize was more than 3,000 U.S. restaurants. Pepsi owns the fountains, so its machines get pulled out and swapped from January through April. Coke already has about 70% of U.S. fountain soda sales by volume, Beverage Digest says.
The breakup case
Wainer's point is about sprawl. Coke gave its bottling to outside companies. That left its headquarters free to build brands. Pepsi's bosses still juggle three big jobs. There's Frito-Lay. There's a U.S. drinks arm with its own trucks and warehouses. And there's a fast-growing business overseas. Activist Elliott Management bought a $4 billion stake last year and pushed for a cleanup. Twelve months later, the results haven't shown up. Laguarta says Pepsi is “open to revisiting every option.” Wainer lists a few. Hand off U.S. bottling. Sell or spin off the drinks business. Sell the North American Quaker unit. Split off the snacks, he argues, and you'd get something close to Mondelez (MDLZ), the Oreo maker. Mondelez trades at about 19 times forward earnings. That means its price is 19 times the profit expected over the next year. Pepsi trades at 14.
Even the protein-shake aisle stings. Coke's Fairlife sales rose 78% from a year earlier. Pepsi's Muscle Milk fell 16%. Coke has nearly a quarter of that category. Pepsi has 3%. Poppi, the prebiotic soda Pepsi bought for nearly $2 billion, is underwhelming. “The status quo is not going to work,” said David Wagner of Aptus Capital Advisors.
Our read
Investments/Risk, IN04. We hold PepsiCo at weight in 14 books and Coca-Cola at weight in 26. Nothing added, nothing trimmed. Pepsi closed Monday, Oct. 19 at 133.57, up 2.08. Here's the lesson for a dividend investor. A blue chip can lag for years while it keeps paying. The check feels like safety. It's still one company's problem to fix. We don't know whether a spinoff happens or whether it works. Kraft Heinz shelved its own split in February, and Wainer says breakups have a mixed record.
Here's where it touches your plan. Many retirees hold a few dividend stocks they bought decades ago and think of as safe. This week, open your brokerage statement and find any single stock above 5% of your portfolio. Then ask whether you own it for the business or for the memory. A dividend check isn't a seatbelt. If one name is that big, bring it to your next review and we'll talk through the size together.