Soft drink giant PepsiCo, Inc. (PEP) and coffee powerhouse Starbucks Corporation (SBUX) are two well-established names in their respective industries, but both stocks have underperformed this year, lagging behind the 20.5% return of the broader S&P 500 Index ($SPX) on a YTD basis.
However, PepsiCo remains a dividend powerhouse, boasting over 50 consecutive years of dividend increases. This remarkable achievement has earned the company Dividend King status, making it a top choice for income-seeking investors who value reliability and stability in their portfolios.
And while Starbucks may not have quite the same track record of dividend payments, its commitment to rewarding shareholders has the coffee chain set for future Dividend Aristocrat status.
For bargain-hunting investors seeking the best dividend stock values this October, here’s how these two passive income picks compare.
The Case for PepsiCo Stock
Founded in 1898, New York-based PepsiCo, Inc. (PEP) operates across more than 200 countries with its vast portfolio of beverages and convenient foods. With a massive market cap of roughly $230.9 billion, its impressive brand portfolio features household names like Lay’s, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker, and SodaStream.
Several of these iconic brands generate more than $1 billion annually in retail sales, underscoring PepsiCo’s massive global reach. Yet, despite the company’s impressive brand recognition, shares of PepsiCo are underperforming the broader market, up just 5% over the past 52 weeks and roughly flat on a YTD basis.
As a Dividend King, PepsiCo has rewarded its shareholders with quarterly dividends since 1965, and 2024 marks the company’s 52nd consecutive year of dividend increases. On Sept. 30, the beverage giant paid its shareholders a quarterly dividend of $1.355 per share, reflecting a 7% increase from the previous year.
This brings its annual dividend to $5.42 per share, for a 3.23% yield at current levels. By maintaining a payout ratio of 64.62%, PepsiCo allocates a healthy amount of its earnings to shareholders.
PepsiCo also plans to return a substantial $8.2 billion to shareholders this year, with $7.2 billion allocated to dividends and $1 billion earmarked for share repurchases, underscoring its commitment to delivering value to investors.
Pepsi reported a mixed bag of results with its Q2 earnings report on July 11. Net revenue of $22.5 billion fell short of Wall Street's $22.6 billion forecast, as price hikes led to heightened demand from private-label brands. Core EPS of $2.28 surpassed expectations by 6.1%.
“For the balance of the year, we will further elevate and accelerate our productivity initiatives and make disciplined commercial investments in the marketplace to stimulate growth... As a result, we now expect to deliver approximately 4 percent organic revenue growth (previously at least 4 percent) and have a high degree of confidence in delivering at least 8 percent core constant currency EPS growth for full-year 2024,” said Chairman and CEO Ramon Laguarta in a statement.
Investors can expect more details from PepsiCo about its full-year forecast when the company reports its third-quarter earnings before the market opens this Tuesday, Oct. 8. Consensus forecasts are calling for Q3 EPS of $2.30, up 2% from last year, on revenue of $23.78 billion.
PEP stock has a consensus “Moderate Buy” rating overall. Out of the 19 analysts offering recommendations, nine suggest a “Strong Buy,” and 10 have a “Hold” rating.
The average analyst price target of $185.71 indicates an 11.1% upside potential from the current price levels.
The Case for Starbucks Stock
Valued at a market cap of around $109.39 billion, Seattle-based Starbucks Corporation (SBUX) is a global powerhouse that has revolutionized the coffeehouse experience. Known for its premium coffee, the company’s portfolio also includes Teavana teas, Seattle's Best Coffee, La Boulange bakery treats, and Evolution Fresh juices. With over 38,000 stores worldwide, Starbucks has transformed coffee into a luxury by combining top-notch products with welcoming atmospheres.
The brand’s focus on quality and its strong global presence has made it a leader in the coffee culture movement. But when it comes to price action, Starbucks stock has struggled despite its industry leadership, as the chain battles intense competition in the coffee and quick-service restaurant sectors alongside global economic trends affecting consumer spending. SBUX is up 4% over the past year, and is just barely green on a YTD basis.
More recently, Starbucks shares gapped higher on Aug. 13 and ended the day up 24.5%, as Wall Street cheered the appointment of Brian Niccol as CEO, effective Sept. 9. Investors hope that Niccol, best known for turning around Chipotle (CMG) with strong same-store sales growth, will bring a fresh approach to Starbucks, too.
Starbucks has built a strong track record of 13 consecutive years of dividend growth, backed by a healthy payout ratio of 62.49%, signaling its dedication to rewarding shareholders. On Aug. 30, it paid a quarterly dividend of $0.57 per share, bringing its annualized dividend to $2.28 - a yield of 2.39%, at current levels.
In its Q3 earnings release, Starbucks noted its 57 consecutive quarters of dividend payments, with a compound annual growth rate (CAGR) of around 20% over that period.
On July 30, Starbucks released its Q3 earnings results, which fell short of top-line expectations but met bottom-line forecasts. Total revenue came in at $9.1 billion, down slightly year over year, while EPS of $0.93 dipped 6.1%. However, the beaten-down stock jumped more than 2% after the earnings release, as the numbers weren’t as dire as investors had anticipated.
In North America, comparable store sales fell 2%, driven by a 6% decrease in transactions, while a 3% uptick in average tickets helped soften the blow. In the U.S., comparable sales mirrored these figures, with a 6% dip in transactions offset by a 4% increase in average ticket size.
Internationally, comparable store sales dropped 7%, with a sharp 14% decline in China driven by a 7% decrease in both transactions and average ticket size. Despite these challenges, Starbucks continued to expand, adding 526 net new stores during the quarter and ending Q3 with a total of 39,477 locations worldwide.
Analysts tracking Starbucks expect the company’s profit to increase slightly year over year to $3.55 per share in fiscal 2024 before rising 9.3% to $3.88 per share in fiscal 2025.
Overall, Wall Street is optimistic, with a consensus “Moderate Buy” rating for SBUX stock. Of the 27 analysts covering the stock, 16 advise a “Strong Buy,” one gives a “Moderate Buy,” eight advocate “Hold,” one suggests a “Moderate Sell,” and one recommends a “Strong Sell.”
The average analyst price target of $100.12 indicates a potential upside of just 3.9% from the current price levels.
PEP vs. SBUX: Which Stock Offers Better Value?
While both PepsiCo and Starbucks have underperformed this year, they still present appealing investment opportunities. Starbucks has recently intrigued investors with Brian Niccol's appointment as CEO, where his extensive experience in driving growth and enhancing customer engagement could rejuvenate the brand. However, PepsiCo stands out as the more stable choice, considering its hard-won Dividend King status and a robust cash return strategy for fiscal 2024.
From a valuation perspective, investors are paying a higher premium for SBUX earnings. PepsiCo trades at 20.63 times forward earnings and 2.47 times sales, while Starbucks trades at 27.19 times forward earnings and 3.00 times sales.
Coupled with PEP’s higher dividend, it looks like PepsiCo is a better buy for value and income investors this October. While Starbucks has potential for a turnaround under its new leadership, PepsiCo’s stability and attractive valuation is likely to offer more immediate appeal to those prioritizing reliable returns.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
