Pepsi: Solid 2025 Performance, 4% Dividend Increase But Risks Remain

"Can This Dividend King Get Back To Strong Growth In 2026?"

Feb 18, 2026

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Current Price: $163.95

Portfolio Purpose: Income 💰

In 2025, I parted ways with my Pepsi (PEP) position.

Since then, shares have rallied more than 12%, outperforming the S&P 500 after a solid Q4 earnings report.

While improvements are encouraging, I continue to rate the stock a Hold due to tight dividend coverage and lingering margin pressure.

Q4 Earnings: A Solid Double Beat 🥊

Pepsi delivered a double beat in Q4:

EPS: $2.26 (+$0.02 beat)
Revenue: $29.43B (+$370M beat)
Revenue growth: +5.6% YoY
Organic sales: +2%

For comparison, peer The Coca-Cola Company (KO) missed revenue expectations, which likely added relative momentum to PEP shares.

Segment highlights:

EMEA: +5% growth
North America: -1%
Food volumes: -2%
Beverage volumes: +1%

Pricing power helped offset volume softness, but food weakness likely reflects affordability issues and the broader adoption of GLP-1 drugs impacting snack consumption.

2026 Outlook: Modest but Stable 👀

Management guided for:

~5% EPS growth
2%–4% organic revenue growth

For a mature consumer staple, that’s respectable. It’s not explosive growth—and execution will matter.

Margins & Profitability: Still a Concern ⏳

Despite the earnings beat:

Operating profit: Down 11% YoY
Margins: Declined from 14% → 12.2%
Net income: $9.6B → $8.24B

As a Dividend King, declining profitability and margin compression aren’t ideal. While 2026 margin expansion is projected, inflation and tariff risks remain overhangs.

Dividend Safety: Covered, But Tight 💵

Dividend raised 4% to $5.92 annually
Estimated dividend obligation: ~$7.8B
Free cash flow covered the dividend—but with limited cushion

I prefer non-REIT payout ratios at 60% or below for comfort and flexibility. Pepsi’s coverage leaves little room for error if volumes weaken further.

Balance sheet strength does help:

A credit rating
~$42.3B long-term debt
~$9B cash on hand
$4.1B debt repaid
$10B buyback program through 2030

Buybacks enhance EPS and dividend safety—but they can also signal limited organic growth opportunities.

Growth Drivers ↗️

Pepsi isn’t standing still:

Acquisitions: Siete & Poppi
Increased stake in Celsius Holdings, Inc.
Activist involvement from Elliott
AI-driven supply chain partnership with NVIDIA (NVDA) and Siemens AG (SIEGY)

Strategically, management is pushing the right buttons. The question is whether execution translates into sustained margin expansion.

Valuation: Slightly Undervalued, Limited Upside 🤷🏾‍♂️

Forward EPS estimate: ~$8.55
Forward P/E: ~19.4x
5-year average P/E: ~22.5x

On paper, shares look modestly undervalued. But after the rally, much of the optimism appears priced in.

I would consider adding on a meaningful pullback in the mid-$150s or below, assuming fundamentals stabilize.

Risks ⚠️

Inflation & tariff impacts
GLP-1 adoption suppressing snack volumes
North American weakness
Tight dividend coverage

Bottom Line ✅

Pepsi delivered a solid quarter and provided stable guidance. The 4% dividend hike reinforces management’s confidence.

However:

Margins are still pressured
Cash flow coverage remains tight
Upside appears limited after the rally

For now, I remain at Hold. I’d need to see:

Clear margin expansion
Stronger North American performance
More comfortable dividend coverage

Only then would I consider upgrading to a Buy.

Do you think Pepsi will weather the storm? What do you think the recent acquisitions? Let me know in the comments.

Happy Investing!

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