The Rise of ESG: 3 Stocks Leading the Environmental, Social, and Governance Movement

Amid a rapid transition towards clean energy and environmental-friendly alternatives, Environmental, Social, and Governance (ESG) investing has gained immense prominence in recent years. Given this backdrop, let us explore some stocks, PepsiCo, Inc. (PEP), Salesforce, Inc. (CRM), and Cisco Systems, Inc. (CSCO), that are presently leading the ESG movement.

Growing climate change concerns and the soaring demand for socially responsible business activity have resulted in a significant increase in ESG investing. Using ESG factors to steer investment decisions is becoming much more widely accepted.

Over the past six months, Vanguard ESG U.S. Stock ETF (ESGV) has gained 11.2%, outperforming the S&P 500, which gained 10.7%. This substantiates investors’ interest in ESG-focused investing.

Despite the political backlash against ESG strategies, there is a general consensus that in light of increased environmental and energy security concerns, the demand for new ESG products will continue to outweigh the supply. Institutional investors, in particular, are eager for asset managers to embed ESG matters more deeply into their investment decision-making processes.

According to a Bloomberg study, global ESG assets are on track to exceed $53 trillion by the fiscal year 2025. In addition, a leading consultancy firm PwC forecasts that total investment in U.S. ESG funds should more than double to $10.5 trillion by 2026.

Moreover, given the current economic backdrop, where the soaring recessionary concerns have resulted in a volatile market, Bradley Davidson, Director and Climate & ESG Lead, RBS International, said, “ESG integration must be seen as a long-term value driver rather than a ‘nice to have’ option.”

Against this backdrop, stocks PEP, CRM, and CSCO, with strong fundamentals, could be wise portfolio additions now.

PepsiCo, Inc. (PEP)

PEP is a popular food and beverage company that operates through its seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; Asia Pacific, Australia, and New Zealand; and China Region.

On May 2, PEP’s board of directors declared a quarterly dividend of $1.265 per share, payable to the shareholders on June 30, 2023. PEP has paid consecutive quarterly cash dividends since 1965, and 2022 marked the company’s 51st consecutive annual dividend increase.

Its annual dividend of $5.06 translates to a 2.39% yield on the current share price. Its four-year dividend yield is 2.74%. The company’s dividend payout has grown at CAGRs of 6.4% and 7.4% over the past three years and five years, respectively.

On April 13, 2023, PEP’s Frito-Lay North America (FLNA) announced its first-ever third-party shipment on an Electric Vehicle (EV) with Schneider National Inc. (SNDR), a premier multimodal provider of transportation, intermodal and logistics services. This is the first third-party transportation shipment on an EV for PEP globally.

David Allen, vice president and chief sustainability officer of PepsiCo Foods North America, commented, "Today's milestone shipment underscores the importance of cross-industry collaboration in building a more sustainable food system and achieving Frito-Lay and PepsiCo Positive's goal of net-zero emissions by 2040."

The stock’s trailing-12-month gross profit margin of 53.38% is 69.3% higher than the industry average of 31.54%. PEP’s trailing-12-month EBIT and levered FCF margin of 13.80% and 5.68% are 80.8% and 111.2% higher than the industry averages of 7.64% and 2.69%, respectively.

PEP’s net revenue came in at $17.85 billion for the fiscal first quarter that ended March 25, 2023, up 10.2% year-over-year. Its non-GAAP gross profit increased 11.2% year-over-year to $9.87 billion. Also, its non-GAAP operating profit came in at $2.80 billion, up 17.1% year-over-year.

Non-GAAP net income attributable to PEP increased 15.4% year-over-year to $2.07 billion. Non-GAAP net income attributable to PEP per common share grew 16.3% year-over-year to $1.50.

For the fiscal second quarter ending June 2023, analysts expect PEP’s revenue to increase 7.2% year-over-year to $21.69 billion. Its EPS is estimated to grow 5.1% year-over-year to $1.95. PEP surpassed EPS and revenue estimates in all four trailing quarters, which is impressive.

Over the past three months, the stock has gained 13.6% to close the last trading session at $192.18. Moreover, it has gained 5.3% over the past month.

PEP’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

PEP has an A grade for Growth and a B for Sentiment and Quality. In the A-rated Beverages industry, it is ranked #12 out of 37 stocks.

Beyond what we have mentioned above, click here to see additional POWR Ratings for Momentum, Stability, and Value for PEP.

Salesforce, Inc. (CRM)

CRM is a cloud-based software company that provides customer relationship management technology that brings companies and customers together worldwide.

As part of Earth Month, on April 5, 2023, CRM announced a Nature Positive Strategy outlining specific actions the company will take to accelerate its existing commitment to a net zero, nature-positive future rooted in people and climate justice.

Suzanne DiBianca, CRM’s EVP & Chief Impact Officer of ESG and Sustainability, believes such initiatives could enhance value creation, innovation, and collaboration.

CRM’s trailing-12-month gross profit margin of 73.34% is 45.6% higher than the 50.37% industry average. Its trailing-12-month EBITDA margin of 17.34% is 95.9% higher than the 8.85% industry average.  

CRM’s total revenues increased 14.4% year-over-year to $8.38 billion during the fiscal fourth quarter that ended January 31, 2023. Its gross profit rose 18.3% year-over-year to $6.29 billion. Also, non-GAAP net income increased 96.4% year-over-year to $1.66 billion, while its non-GAAP net income per share rose 100% year-over-year to $1.68.

For the fiscal year 2024, the company expects its revenue to come between $34.5 billion and $34.7 billion and non-GAAP earnings per share to come in between $7.12 and $7.14.

Analysts expect CRM’s revenue for the fiscal second quarter (ending July 2023) to come in at $8.49 billion, indicating a 10% year-over-year growth. The company’s EPS is expected to increase 43.2% year-over-year to $1.70 for the same quarter. Additionally, CRM topped consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.

The stock has gained 12.6% over the past three months to close the last trading session at $192.61. Moreover, it has gained 31.6% over the past six months.

CRM’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.

CRM also has an A grade for Growth and Sentiment and a B for Quality. It is ranked #14 out of 134 stocks in the Software – Application industry.

Click here to access additional ratings for CRM’s Stability, Value, and Momentum.

Cisco Systems, Inc. (CSCO)

CSCO designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry worldwide.

On April 24, CSCO unveiled the latest progress towards its vision of the Cisco Security Cloud, a unified, AI-driven, cross-domain security platform. CSCO's new XDR solution and the release of advanced features for Duo MFA should help organizations better protect the integrity of their entire IT ecosystem.

Sourcing renewable electricity is a critical part of CSCO's GHG reduction strategy. In fiscal 2022, it consumed 1,319,605 MWh of renewable electricity, making up 89% of its total global electricity demand.

In the fiscal year 2022, it installed a small rooftop solar system at one of its sites in Pune, India. The company’s 1.2 MW of onsite solar systems in Texas, North Carolina, and India produce about 1.4 million kWh of electricity and avoid approximately 750 metric ton CO2e a year.

In addition, CSCO’s goal is to have 100% of new CSCO products and packaging incorporate Circular Design Principles by 2025, with CSCO collaboration devices playing a large part in this.

Jeetu Patel, CSCO’s EVP and GM, Security and Collaboration, commented, "At Cisco, we're laser-focused on helping to create a more sustainable and positive impact across the globe. One of the critical reasons we design products and solutions with circular design principles in mind is to help our customers meet their environment, sustainability and governance goals, and we're the only company to offer a feature of this kind."

CSCO declared a quarterly dividend of $0.39 per common share, a one-cent increase or up 3%, over the previous quarter's dividend. The dividend was paid to all stockholders on April 26, 2023.

Its annual dividend of $1.56 translates to a 3.36% yield on the current share price. Its four-year dividend yield is 3.02%. The company’s dividend payout has grown at CAGRs of 2.8% and 5% over the past three and five years, respectively.

In terms of the trailing-12-month net income margin, CSCO’s 21.26% is 701.1% higher than the 2.65% industry average. Also, its trailing-12-month ROCE, ROTC, and ROTA of 27.92%, 17.06%, and 11.79% are significantly higher than the industry averages of 1.40%, 1.97%, and 0.52%, respectively.

For the fiscal second quarter that ended January 28, 2023, CSCO’s total revenue increased 6.9% year-over-year to $13.59 billion. The company’s non-GAAP operating income rose 1.1% from the prior-year quarter to $4.41 billion. Its non-GAAP net income rose 2.6% year-over-year to $3.64 billion.

In addition, its non-GAAP EPS came in at $0.88, representing a 4.8% increase from the prior-year quarter.

For the fiscal year 2023, the company expects its revenue to grow between 9% and 10.5% year-over-year and non-GAAP EPS to come in between $3.73 and $3.78.

Analysts expect CSCO’s revenue and EPS for the fiscal fourth quarter ending July 2023 to increase 14.1% and 24.7% year-over-year to $14.95 billion and $1.04, respectively. It topped the consensus EPS estimates in each of the trailing four quarters.

Over the past six months, the stock has gained 4.8% to close the last trading session at $45.96.

CSCO’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

The company has an A grade for Quality and a B for Stability. Within the B-rated Technology – Communication/Networking industry, it is ranked #5 out of 50 stocks.

We have also given additional CSCO grades for Growth, Value, Momentum, and Sentiment. Get all CSCO ratings here.

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PEP shares were trading at $192.85 per share on Thursday morning, up $0.67 (+0.35%). Year-to-date, PEP has gained 7.47%, versus a 6.42% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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