1 Dividend King at a 52-Week Low and Another at a 52-Week High to Buy Now

The ICE U.S. Dollar Index is a benchmark that tracks the dollar’s strength compared to a basket of foreign currencies. The index came close to a 52-week low in late September and then pole-vaulted to a 52-week high last week. Tariffs and the onshoring of U.S. manufacturing could lead to inflation and an even stronger dollar.

A strong dollar can impact companies that convert sales made outside the U.S. from foreign currencies into dollars.

For the nine months ended Sept. 7, 2024, Pepsi generated 61% of sales in North America and 67.8% of operating income. Pepsi isn’t as globally focused as Coke, where North America comprised 39.3% of consolidated revenue for the nine months ended Sept. 27, 2024, but it is more global than Walmart.

In fiscal 2024, which ended Jan. 31, 2024, Walmart’s international segment made up just 17.8% of revenue and 16.8% of operating income.

The real figure is a bit higher than that because some Sam’s Club stores are outside the U.S., but Sam’s Club is reported as a separate segment. Still, Walmart makes the vast majority of its earnings in U.S. dollars. It isn’t immune from tariffs, which would impact its costs and supply chain. However, it doesn’t face the currency risks of a company like Pepsi.

Walmart is executing much better than Pepsi right now, and there’s reason to believe it can continue doing well, whereas the timeline of Pepsi’s recovery is uncertain. However, Pepsi is a far less expensive stock than Walmart, and it has a higher yield.

As you can see in the following chart, Pepsi sports a price-to-earnings (P/E) ratio and a forward P/E ratio below its historical average. In contrast, Walmart’s P/E and forward P/E are both above its historical average.

The valuation discrepancy indicates that investors are relatively pessimistic about Pepsi and optimistic about Walmart, which makes sense, given how both companies have been performing.

Similarly, Pepsi’s dividend yield is significantly above the average over the last decade, whereas Walmart’s yield has plummeted below 1%.

Pepsi’s yield is elevated because it has continued to increase its payout despite a languishing stock price, whereas Walmart’s stock price has gained far more than its dividend growth rate, which has compressed its yield. Walmart may be a Dividend King, but it is no longer a viable source of passive income, whereas Pepsi is an excellent source of passive income — especially compared to the S&P 500, which yields just 1.3%.

Walmart is worth buying for investors looking for a company that can continue doing well even if the dollar strengthens and consumer demand weakens. However, Pepsi may be the better buy for value investors looking for a sizable dividend. If Walmart’s results disappoint, it could suffer a significant sell-off, given its expensive valuation is based on sustained growth. In contrast, the sentiment for Pepsi is already bearish, so investors could already be expecting weak results.

The better buy comes down to your risk tolerance, preference for growth versus value, and investment objectives — which could include a pure focus on long-term gains or a mix of long-term gains and passive income. For balanced investors, both stocks could be worth buying now. Investing in a 50/50 split of Walmart and Pepsi produces a yield of 2.1% — which is still above the S&P 500 average while giving you a mix of quality and value.

Before you buy stock in Walmart, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Walmart wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $858,854!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 18, 2024

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

1 Dividend King at a 52-Week Low and Another at a 52-Week High to Buy Now was originally published by The Motley Fool