In the 1980s, PepsiCo became the owner of one of the world’s largest navies. Not a metaphor. After a Cold War-era deal with the Soviet Union, Pepsi found itself in possession of 17 submarines, a cruiser, a frigate, and a destroyer. This bizarre episode has since become a favorite piece of financial trivia.
Fast forward to today: Pepsi is no longer collecting warships, but it might be quietly sailing into undervalued territory for dividend investors.
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In the late 1980s, the Soviet Union was short on hard currency and needed to pay for millions of dollars’ worth of Pepsi concentrate. So instead of cash, they paid with military hardware. For a short period, Pepsi had a fleet larger than some countries. The company quickly sold the ships for scrap, but the story remains one of the most surreal moments in corporate history.
That boldness continues today, though now it’s focused on infrastructure and health-conscious investments rather than warships.
PepsiCo’s stock ($PEP) has dropped in price over the past year and is currently trading at its lowest valuation in years. That could spell opportunity, or signal caution, depending on how you interpret the data.
Key points:
So why the concern?
While Pepsi’s dividend history is rock solid, its payout coverage is starting to look tight.
The company has clearly prioritized long-term investment over short-term cash flexibility. That creates some short-term strain on dividend coverage, but also lays groundwork for future returns.
Much of Pepsi’s recent capex growth is tied to the PEP+ sustainability initiative launched in 2021. The initiative focuses on:
This includes sustainable farming, emissions reduction, and healthier product development. These are not near-term earnings drivers, but are essential for long-term brand value and regulatory resilience.
Pepsi is also seeing strength in:
These are important levers for margin expansion and competitive positioning, especially with younger consumers.
On the surface, Pepsi looks like a textbook dividend value. The yield is high, the stock is historically cheap, and the business has decades of reliable income generation.
But the risks are real. Free cash flow is tight, and dividend coverage has weakened. Capex normalization over the next few years should help, and Pepsi’s debt levels are still manageable if additional support is needed.
Bottom line: If you’re a dividend-focused investor with a long-term horizon, Pepsi may be worth serious consideration. Just be aware of the short-term pressure on cash flow.
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Disclosure: Long PEP.
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