PepsiCo was the Fund's second-weakest performer over the quarter despite delivering a broad-based beat on both revenue and earnings at its Q1 2026 results in April. Earnings per share grew 8.8%, comfortably ahead of the 4.5% expected, and organic sales growth was 2.6% v 2.4% expected. Encouragingly, the North American snacks business posted its first positive volume inflection in 14 quarters. Overall, we see the sell-off as unwarranted and retain conviction in the investment case for PepsiCo. The stock is trading at a significant discount to both peers and its own history, and a dividend yield above 4% backed by 54 consecutive years of increases supports our view.

We added to positions in PepsiCo on price weakness. The company is well-positioned in the Consumer Staples sector, which is expected to provide stable growth. Our holdings in Consumer Staples are all-weather positions that should perform well even in volatile markets. PepsiCo's strong operational performance and attractive valuation make it a compelling investment as we anticipate a rebound in the market.

PepsiCo is currently undergoing a strategic re-alignment driven by activist investor Elliott Management, which includes re-franchising the filling business and making portfolio adjustments. These initiatives are expected to lead to significant improvements in internal efficiency and profit margins. The potential for price appreciation is substantial due to the anticipated reassessment of the share value. Despite these changes, PepsiCo remains a financially stable dividend aristocrat, having reliably increased its distributions over five decades.

Elliott Investment Management holds a $4 billion investment in PepsiCo Inc., recognizing it as a leading consumer franchise with over 100 years of performance. Despite recent operational challenges and stock-price underperformance, the firm believes PepsiCo has a unique opportunity to re-accelerate growth through strategic reinvestment and improved operations. The proposed actions could unlock significant shareholder value, with potential for over 50% upside. Elliott aims to collaborate with management to enhance focus, drive innovation, and restore PepsiCo's market leadership.

Despite facing headwinds in its North American snacking division, PepsiCo's international segment showed resilience with a 5% growth during the quarter. Management remains confident in long-term international expansion and has a proven track record of managing input cost pressures, which suggests it can navigate tariff-related inflation. The company's diversified global footprint and extensive brand portfolio across beverages and snacks, along with its demonstrated pricing power, position it well for sustainable growth over the long term.

PepsiCo, Inc. was a modest detractor in Q2, as soft beverage volume and margin pressure led to weaker-than-expected results. The company reported revenue of $17.9 billion, down 1.8% year-over-year, impacted by FX headwinds and promotional activity in North America. Despite these challenges, we continue to view PepsiCo as a high-quality, defensive compounder with strong global brands and consistent cash generation. With a growing dividend, geographic diversification, and strong balance sheet, we believe PepsiCo remains a great investment.

Despite PepsiCo’s stock trading at a modest discount to fair value, the absence of clear actions for immediate improvement in Frito-Lay’s and carbonated soft drink (CSD) trends makes it challenging to foresee a narrowing of the valuation gap. The U.S. Department of Health’s push for stricter regulations on artificial ingredients and carbonated soft drinks in schools adds to the already significant challenge posed by GLP-1-driven shifts in consumer behavior. While PepsiCo is better positioned than many peers to navigate the artificial ingredient issue, the lost beverage volume is unlikely to be recovered. This structural change creates a difficult financial outlook despite the company’s strong brand portfolio.

PepsiCo is a leading snack and beverage company that we know well, having owned it several times. The current opportunity to buy shares is due to a deceleration in top-line growth and concerns about demand from new weight loss drugs and health opposition to processed foods. Despite these challenges, we view PepsiCo as a well-managed company with a history of steady earnings and dividend growth, making it a good investment in a volatile stock market. The current dividend yield stands at 3.6%, which adds to its attractiveness as a holding.