Why Rate Cuts May Not Put the Fizz Back in Pepsi’s Stock
Even for dividend investors, PepsiCo Inc. (NASDAQ: PEP) shareholders have faced tough times. PEP stock is down 5.89% in 2025 and 19.5% over the last 12 months. But that would be oversimplifying the situation. The company’s stock has been under pressure over the previous three years.
However, this isn’t a story unique to Pepsi. The entire consumer staples sector has been under pressure for several years. This is a simple yet complex margin and revenue story.
That’s why the idea that interest rate cuts will automatically put the fizz back into PEP stock may be too simplistic. In fact, recent news around Pepsi indicates that the company may have larger issues that need to be addressed before getting back to firing on all cylinders.
GLP-1 Drugs and Pepsi’s Demand Challenges
The over-the-fold headline will tell you that GLP-1 drugs are turning consumers away from soft drinks and salty snacks. Therefore, what was once PepsiCo’s strength in a competitive sector is now becoming a double whammy.
Common sense would dictate that the rapid and growing adoption of GLP-1 drugs will impact companies like PepsiCo. A suppressed appetite and reduced cravings threaten the company’s portfolio of comfort snacks, which are often consumed on autopilot.
However, PEP stock has been under pressure since 2022, before GLP-1 drugs arrived. The total return for PepsiCo stock in the last three years is negative 9.1%. That means even though investors have been collecting a growing dividend that currently yields 4.02%, the total value of their PEP stock position is down.
Rising inflation and interest rates, which pressure the company’s core consumer, were the prime movers behind the stock's weak performance. At first, Pepsi demonstrated pricing power, which was reflected in its earnings numbers. However, consumers have increasingly turned to store brands (i.e., house brands) because of lower prices.
The takeaway is that it will take some time before investors can say if GLP-1 drugs are an existential threat to Pepsi and its competitors. After all, that’s not showing up in the company’s topline numbers. Through the first two quarters of 2025, Pepsi has posted $40.65 billion in revenue compared to $40.75 billion through the first two quarters in 2024.
Earnings Pressure Highlights Pepsi’s Real Problem
Investors may have more concerns about the company’s earnings. Through the first two quarters, the company’s $3.6 earnings per share (EPS) were down 7% year over year (YOY).
That's one reason Elliott Investment Management took a $4 billion stake in the company. The company is now pressuring Pepsi to improve its margins. One measure Elliott is looking for is for Pepsi to sell off some of its low-margin or underperforming brands.
Essentially, Elliott believes that the company, which has benefited from a diverse portfolio beyond soft drinks, looks bloated at a time when companies need to focus on margin growth.
For example, The Coca-Cola Company (NYSE: KO) is down about 5.2% in the last 12 months, but it’s up about 8.8% in 2025. Significantly, Coca-Cola has posted 2% YOY EPS growth.
The Double-Edged Impact of Rate Cuts on Pepsi
Economists and analysts are debating whether and how much interest rate cuts will benefit Wall Street. However, the core reason for the rate cuts lives on Main Street. If consumers, particularly lower-income consumers, get some relief, that could be bullish for consumer staples companies like Pepsi, which could lead to some topline growth.
But that could come at the expense of the company’s margins. Historically, rate cuts, even a modest 25 bps (basis point or 0.25%) cut, lead to higher inflation. One of the first places this inflation will appear is in commodity prices. That will impact the company’s margins even as Elliott pressures it to improve them.
The good news for investors is that PEP stock appears reasonably valued. At around 17.2x forward earnings, it’s trading at a discount to its historical average and the consumer staples sector average.
There may be some concern over the company’s payout ratio; however, for now, the dividend looks well covered by the company’s free cash flow.
Learn more about PEP
