Is PepsiCo a Buy After an Activist Investor Took a $4 Billion Stake in the Dividend King Stock?

Key Points

• Pepsi’s dirt-cheap valuation showcases investor disappointment in the snack and beverage behemoth.

• Given Pepsi’s strategic shifts, the company may be receptive to suggestions from an activist investor.

• Pepsi pays an ultra-reliable dividend and is chock-full of upside potential.

• 10 stocks we like better than PepsiCo ›

PepsiCo (NASDAQ: PEP) soared as much as 7.2% intraday on Sept. 2 in response to news that activist investor Elliott Investment Management took a $4 billion stake in the beverage and snack giant. With a market cap of around $200 billion, the stake gives Elliott roughly 2% ownership in the company.

But since then, Pepsi's shares have tumbled, down to $141.71 as of market close on Sept. 8. This means that Pepsi dropped lower than it was before the Elliott announcement.

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Here's how activist investors can influence companies, the reasons they usually get involved, Elliott's argument for why Pepsi can turn around, and whether Pepsi is a dividend stock worth buying now.

Image source: Getty Images.

The activist impact

Activist investors acquire large stakes in a company's stock in an attempt to gain influence and address solvable problems. Often, activists will target companies with strong brands that have underperformed in recent years. Their influence can depend on the size of the stake and the reasoning. Sometimes, activists merely suggest changes, while other times they may go for board seats.

An exciting scenario can emerge when an activist makes a play in a company that you own or want to buy and makes suggestions that you agree with. A recent example is Honeywell International (NASDAQ: HON), an industrial heavyweight in aerospace, automation, building technologies, industrial internet of things, high-performance chemicals and materials, safety and productivity solutions, and more. The stock had been a longtime winner and was even added to the Dow Jones Industrial Average (DJINDICES: ^DJI) in 2020. But Honeywell's conglomerate structure began to impede its innovation, and the company failed to capitalize on emerging trends relative to its peers.

In November 2024, Elliott announced a more than $5 billion stake in Honeywell and argued that it should split into two companies -- Honeywell Aerospace and Honeywell Automation -- to unlock value. And Honeywell listened.

In February of this year, it announced plans to break into three stand-alone publicly traded entities by the end of 2026. The transition will take time and will likely come with a significant amount of near-term headaches. However, in the long term, it's the right move and showcases how activist investors can influence large, industry-leading companies with relatively small stakes.

Pepsi is packed with potential

Elliott's 75-page report on Pepsi features its reasoning for building a stake and why it believes Pepsi can "reclaim its reputation as a world-class operator."

Elliott applauds Pepsi on its diversified lineup of top beverage and snack brands and international influence. It notes how the stock is dirt cheap by valuation metrics like price-to-earnings (P/E) ratio, and points out that Pepsi is now trading at a discount to the S&P 500 Consumer Staples index.

But Elliott doesn't shy away from criticism, pointing out Pepsi's most glaring flaw -- its margin erosion in North American snacks and beverages.

"Weakness in North America has weighed on total company organic growth and earnings, despite strong execution internationally," said Elliott in the Sept. 2 presentation.

Elliott suggests that a newly focused beverage brand, a refranchised bottler network, better management, a right-sized food and snack asset base, an optimized portfolio, and reduced waste can revitalize Pepsi's North American business. When paired with its strong international business, Elliott projects that Pepsi has at least 50% upside if organic revenue can shift from growing by low single digits to mid single digits, adjusted operating margin improves, adjusted earnings per share grow at double digits, and Pepsi commands a higher valuation.

In its Sept. 2 letter, Elliott argued that PepsiCo Beverages North America's "long-term underperformance stems from several related strategic missteps, including self-inflicted share losses in soda, and underperforming vertically integrated bottling structure, and a proliferation of new brands and [Stock Keeping Units] SKUs that has strained focus and execution." This is the part of Elliott's argument that I believe makes the most sense.

Vertical integration gives a company greater control over its operations, but it can also lead to inefficiency. One of Coca-Cola's (NYSE: KO) greatest advantages is that it doesn't bottle most of its beverages. Instead, it relies on a network of around 200 bottling partners worldwide. These partners manufacture, package, merchandise, and distribute final branded beverages to their customers and vending partners.

This capital-light approach helps Coca-Cola achieve extremely high operating margins (usually in the mid-to-high 20% range compared to mid-teens operating margins for Pepsi). And Coke also has far fewer brands than Pepsi, which can help make the company's marketing more focused.

Pepsi is already turning around

Elliott's arguments make sense, especially within the context of Pepsi's North American beverage business. However, it would be a mistake to overlook the progress Pepsi has already been making in food and snacks.

Pepsi has adjusted to consumer pressures by offering its snacks in smaller quantities and by building out its portfolio with acquisitions that target health-conscious consumers and "mini-meals" -- which are filling yet nutritionally balanced snacks. Pepsi stock soared to its highest in five years after its latest quarterly report and management commentary suggested Pepsi was heading in the right direction.

In this case, Elliott seems to be mostly suggesting ideas that Pepsi is already implementing or has considered, which could serve as a catalyst for real change.

Pepsi is a great value

Pepsi checks all the boxes of a high-yield stock to buy now. The stock is a passive income powerhouse at a compelling value, with a P/E ratio of just 17.7, a dividend yield of 4%, and 53 consecutive years of boosting its dividend. After years of the stock price stagnating and underperforming its peers, Pepsi is showing signs of improvement.

Elliott's presentation offers a glass-half-full outlook on where the company could be if it addresses its biggest issues. However, some investors may want to tune into Pepsi's upcoming earnings call on Oct. 9, which will likely feature commentary and analyst questions related to Elliott's suggestions.

So far, all Pepsi has done to address Elliott's note is release a less than 100-word formal response that it will review Elliott's perspectives.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.