Buyers Beware of PepsiCo Stock (PEP) Ahead of Next Week’s Q2 Earnings Call

PepsiCo (PEP), the iconic snack and beverage giant, is facing real pressure. Despite its reputation as a defensive stalwart and dividend king, the stock is down 10% year-to-date. It has delivered minimal gains over the past five years, essentially flat without dividends, or about +16% when including reinvested payouts. Over the past five years, the stock has significantly underperformed the market average, as measured by the S&P 500, according to TipRanks data.

In my view, since PepsiCo has maintained a payout above 100% in recent years—and now has a dividend yield comparable to that of 10-year Treasuries—the company is, in practice, “buying” shareholder loyalty. At the same time, its core business shows clear signs of weakening. This approach could easily become unsustainable if it isn’t backed by a genuine operational turnaround, which is why I recommend Selling the stock, ahead of its pivotal earnings call later this month.

Naturally, PepsiCo’s Q2 earnings report, set for July 17th, might bring some surprises. However, I see little reason to expect that a single quarter will reverse the structural challenges associated with changing consumer habits.

PepsiCo’s Structural Headwinds and Payout Pressure

In theory, PepsiCo has a problem, and it appears increasingly structural, which suggests it will likely require actionable intervention from the management team. Beyond tariffs and consumer spending issues, let’s start with the biggest narrative shock: GLP-1 drugs (Ozempic, Mounjaro, etc.) and the changing consumer habits they have prompted. PEP is heavily exposed to snacks (the Frito-Lay segment) and sugary drinks—precisely the kinds of products most sensitive to these shifts in consumption habits, especially in the U.S.

Frito-Lay is seen as the jewel in PepsiCo’s crown—highly profitable and a clear market leader—but it’s been facing consecutive volume declines, with growth relying more on price increases than actual volume gains.

Last year, revenue and volumes declined by 0.5% and 2.5%, respectively, signaling that price elasticity may have reached its limit. Since the start of 2025, PepsiCo has merged the Frito-Lay segment with Quaker in North America, creating the PFNA (PepsiCo Foods North America) segment. This segment has already experienced a 2% decline in organic growth and a 1% drop in year-over-year volumes in Q1 2025.

On a consolidated basis, over the past twelve months, PepsiCo’s revenues have stayed virtually flat while operating income grew by just 2%—slightly below the core PCE inflation rate of 2.7% per year. In other words, PepsiCo’s real operating profit growth is actually negative after adjusting for inflation, which in practice means its true cash generation power is shrinking, even though the top line looks steady.

And this naturally becomes a problem for the dividend thesis. In both 2022 and 2024, PepsiCo’s free cash flow payout ratio exceeded 100%, a clear indication that the company has been adhering to its commitment to reward shareholders and offset challenges, making the stock attractive to income-focused investors.

Currently, the dividend yield of 4.2% remains attractive, but maintaining and growing it is increasingly in question as earnings grow at a slower rate than inflation, which raises a cautionary flag.

This is especially relevant given the company’s pledge to return $8.6 billion in dividends and buybacks this year, versus a free cash flow of just $7.5 billion over the last 12 months, which serves as a rough proxy. So, if that plays out, this would be the third time in the past four years that PepsiCo’s payout ratio has exceeded 100%.

Long-Term Growth Trends Begin to Fade

Looking at the practical side, the main reasons behind this year’s underperformance stem from significant downward revisions, particularly in the long term, given the severity of the structural headwinds mentioned above.

For example, six months ago, projections for Fiscal 2025 expected revenues to grow by 2.6%, but now those projections show virtually no growth at all. Similarly, estimates for 2026, 2027, and 2028 have been cut by 3%, 4%, and 5%, respectively, compared to the numbers at the start of the year. In other words, the projected 5-year CAGR for revenues is now about 3.9%, down from 5.5% earlier this year.

The same trend applies to EPS 5-year CAGR projections, which were around 6.7% six months ago but have now dropped to roughly 5.4%. For a steady, mature growth company like PepsiCo—especially one with a defensive, income-focused thesis—this slowdown, even if it looks small on paper, is actually quite meaningful. It reflects prolonged market skepticism, which generally aligns with the company’s own guidance for the short to medium term, and helps explain why a stock that rarely underperforms is doing just that.

Q2 Earnings Set the Stage for Cash Flow Clarity

PepsiCo is set to report its Q2 results on a much lower note, with compressed multiples—trading at 12.7x EV/EBITDA, roughly 23% below its historical average, despite carrying a 20% premium over the sector. This sets the stage for a potentially positive market reaction if the company manages even a modest upside surprise, such as stable volumes, resilient price pass-through, or reaffirmed guidance.

Although PepsiCo has missed EPS estimates only once in the past five years—precisely last quarter—the market will likely focus heavily on EPS coming in above $2.03 and revenues exceeding $22.3 billion as key triggers for the post-earnings reaction.

Focusing on the income thesis, I believe free cash flow will be the main topic of conversation on earnings day. A clear message that shareholders can expect the company to meet its remuneration guidance without exceeding the full payout would be a massive short- to medium-term win for the stock, in my view.

To that end, I’m watching closely how the company plans to cut fixed costs (SG&A) and reduce operating expenses. According to CEO Ramon Laguarta, the strategy—especially in the Frito-Lay segment—is to protect the volume base against price elasticity and shifting consumer habits by betting on more affordable packaging and combos that increase purchase frequency, such as expanding single-serve lines priced below $2.

In parallel, operational management is focusing on minimizing fixed costs by improving logistics fulfillment rates and refining the assortment granularity at the point of sale—that is, adjusting the product mix by channel, region, and store type to ensure faster inventory turnover.

Signs that these strategies are taking hold should be the main drivers behind a revival in bottom-line growth trends, which would in turn boost free cash flow generation, potentially above the promised payout.

Is PepsiCo a Buy, Hold, or Sell?

Most Wall Street analysts aren’t very optimistic about PEP stock at the moment. From the 13 experts covering the stock over the past three months, only three recommend buying it, while the other ten suggest holding. PEP’s average stock price target of $148.33 implies a potential upside of approximately 10% from the current price.

See more PEP analyst ratings

Structural Headwinds Keep Pressure on PEP

I would say the odds are stacked against PepsiCo right now, as the company is being forced to show a turnaround—or at least signs of one-in its volume and organic sales, mainly in the snacks segment (PFNA) in the U.S. The promise of maintaining an attractive dividend still supports a bullish income thesis, but the structural headwinds, if left unaddressed, put that sustainability at serious risk.

I don’t believe Q2 results will suggest any structural changes that could reverse these pessimistic trends, and there are few signs indicating otherwise in my view. Considering the overall weak momentum in the beverage and processed food sector, I expect PepsiCo to likely continue underperforming this year, which is why I’m taking a Bearish stance on the stock.