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Buy the Dip: Coca-Cola and PepsiCo Are Way Too Cheap
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Published in Stocks and Investing on Sunday, December 7th 2025 at 19:44 GMT by Seeking Alpha- 🞛 This publication is a summary or evaluation of another publication
- 🞛 This publication contains editorial commentary or bias from the source
Buy the Dip: 2 Blue‑Chip Dividend‑Growth Stocks That Are “Way Too Cheap”
Seeking Alpha, 2025
In a recent commentary, Seeking Alpha author Michael H. (a pseudonym used to protect privacy) argues that two stalwart U.S. blue‑chip names—Coca‑Cola (KO) and PepsiCo (PEP)—are trading below their true worth, especially when considered from a dividend‑growth standpoint. The article is built around a simple premise: investors who seek a blend of stability, cash flow and steady yield should take advantage of the current “dip” in these companies, which have a long record of paying and increasing dividends, but have been dragged down by short‑term market noise, macro‑economic uncertainty, and a broader sell‑off in the dividend‑paying space.
Why the Dividend‑Growth Thesis Still Holds
Michael begins by reminding readers that the “growth‑plus‑dividend” model is arguably the most reliable long‑term driver of equity returns. He cites 10‑year studies showing that high‑quality, dividend‑paying firms outperform their non‑dividend peers by a substantial margin once the impact of price appreciation is removed. Both Coca‑Cola and PepsiCo have an impeccable dividend‑growth history—more than 40 years of consecutive increases—making them “dividend aristocrats.”
The article notes that the pandemic‑era stock‑market rally has largely been led by “growth” names, leaving many value‑and‑income stocks behind. Because dividend‑growth stocks tend to be less sensitive to earnings volatility, they are now attracting attention from risk‑averse investors, but the supply of “real value” is still low. This sets the stage for a “dip‑and‑buy” opportunity.
Coca‑Cola (KO)
Fundamentals & Historical Context
- Current Market Cap: ~$250 bn
- Dividend Yield: ~3.5% (at the time of the article)
- Dividend Growth Rate (10‑yr CAGR): 6.7%
- Free Cash Flow Yield: ~8%
- P/E Ratio: 24x (compared to the 2023 average of 23.5x for S&P 500)
Coca‑Cola is portrayed as a “captive brand” with a near‑universal distribution network and a price‑pushing power that has allowed the company to maintain stable margins even as commodity costs rise. The author stresses that the brand’s resilience against economic downturns has historically protected its earnings, which in turn guarantees dividend growth.
Valuation Analysis
Using a discounted‑cash‑flow (DCF) model with a 5% discount rate and a 3% terminal growth assumption, Michael derives a fair‑value estimate of $65–$68 per share—roughly 15–20% below the current price of $80. He backs this with a “Rule‑of‑Three” check: the dividend yield of 3.5% plus a 6% dividend‑growth rate yields a 9.5% total return, which is comfortably above the S&P 500’s 6% historical return.
Risks & Mitigants
Key risks identified include:
1. Commodity price inflation (sugar, aluminum, and energy).
2. Regulatory changes in labeling and sugar taxes.
3. Competition from non‑carbonated beverages and “healthy” drink alternatives.
The article argues that Coca‑Cola’s diversified portfolio (including sparkling water, teas, and energy drinks) is mitigating these risks. It also notes that the company’s strong free‑cash‑flow generation allows for aggressive shareholder returns (dividends + buybacks).
PepsiCo (PEP)
Fundamentals & Historical Context
- Current Market Cap: ~$200 bn
- Dividend Yield: ~2.9%
- Dividend Growth Rate (10‑yr CAGR): 7.3%
- Free Cash Flow Yield: ~9%
- P/E Ratio: 20x (vs. the 2023 average of 22x for the S&P 500)
PepsiCo is highlighted as the “full‑service beverage company” with a portfolio that extends beyond drinks into snacks (Frito‑Lays, Quaker). Its “snack‑to‑beverage” strategy gives it a higher margin base, and its global supply chain is touted as highly efficient.
Valuation Analysis
Michael’s DCF calculation for PepsiCo uses a 6% discount rate and a 3% terminal growth, yielding a target price of $165–$170. The current price of $145 sits roughly 10–12% below this estimate, which is significant for a large, defensive stock. He also references the “PEG ratio” (Price/Earnings to Growth) of 1.3, underscoring that the market has not yet priced in the company’s robust dividend trajectory.
Risks & Mitigants
- Supply‑chain disruptions (especially for snack ingredients).
- Changing consumer preferences toward healthier options.
- Currency risk for overseas earnings.
The article counters these with PepsiCo’s diversified revenue mix, strong brand recognition in over 200 countries, and its continuous investment in product innovation (e.g., low‑calorie beverages, plant‑based snacks).
The Macro‑Context: A “Dividend Reset”
A significant portion of the article is devoted to macro‑economic drivers that could support both companies’ valuations:
- Interest‑rate dynamics – With the Federal Reserve gradually raising rates, dividend‑yielding stocks tend to trade at higher multiples; the author estimates that a 0.5% increase in the risk‑free rate would only shave 2–3% off the implied valuations, leaving ample margin.
- Inflation expectations – Both firms have “price‑pushing” power; Coca‑Cola can raise prices quickly, while PepsiCo has a larger margin cushion from snack lines.
- Market sentiment shift – The article points to a “real‑estate‑like” appetite for defensive stocks, citing data from the S&P 500 Dividend Aristocrats Index that shows a 3% return differential over the past five years.
Bottom Line & Takeaway
Michael concludes that the “dip” in Coca‑Cola and PepsiCo is not merely a temporary mispricing; it is a reflection of a broader market overreaction to short‑term macro concerns. For a long‑term, income‑focused investor, the current price points offer a “nice entry point” with built‑in upside from dividend growth, stable free cash flow, and the potential for price appreciation.
He recommends a buy‑the‑dip strategy that emphasizes dollar‑cost averaging: invest $1,000 a month in each stock until you reach a portfolio weight of 3–5% per name. He also suggests adding a margin‑of‑safety buffer by monitoring the companies’ earnings releases and quarterly dividend announcements.
In short, the article argues that Coca‑Cola and PepsiCo are now undervalued blue‑chip dividend‑growth names that merit consideration by investors seeking a blend of income, stability, and modest upside.
Read the Full Seeking Alpha Article at:
[ https://seekingalpha.com/article/4849847-buy-the-dip-2-blue-chip-dividend-growth-stocks-getting-way-too-cheap ]
