Why PepsiCo Outshines Illinois Tool Works as a Dividend King Buy in 2026

For value investors prioritizing income generation, the choice between PepsiCo (NASDAQ: PEP) and Illinois Tool Works (NYSE: ITW) as a Dividend King buy in 2026 hinges on valuation, yield, and long-term sustainability. While both companies boast decades of consecutive dividend growth, PepsiCo's compelling combination of a near-4% dividend yield, historically low valuation metrics, and strategic reinvention positions it as a superior option for patient investors. In contrast, ITW's more modest yield and elevated valuation metrics suggest it may lag in delivering outsized returns.

PepsiCo: A Discounted Income Powerhouse

PepsiCo's forward price-to-earnings (P/E) ratio of 16.2 as of late 2025 represents a sharp discount to its 10-year median of 26.3. This undervaluation, coupled with a dividend yield exceeding 4%-well above its historical average-makes it a standout for income-focused investors. Such a yield is particularly attractive in a low-interest-rate environment, where traditional fixed-income assets struggle to keep pace with inflation.

The company's ability to sustain and grow dividends is further bolstered by its strategic pivot toward healthier products. As consumer preferences shift toward wellness and sustainability, PepsiCo has aggressively expanded its portfolio of low-sugar beverages, plant-based snacks, and functional foods. This pivot not only aligns with macroeconomic trends but also insulates the company from volatility of traditional packaged goods.

Illinois Tool Works: Conservative but Overvalued

Illinois Tool Works, while a stalwart of industrial manufacturing, presents a less compelling case for 2026. Its dividend yield of 2.37%-significantly lower than PepsiCo's-offers limited appeal for income seekers. Moreover, ITW trades at 22.5 times forward earnings, a premium to its historical averages and to PepsiCo's valuation. This premium is further amplified by its price-to-free-cash-flow ratio of 25.41, which suggests investors are paying more for each dollar of free cash flow compared to PepsiCo.

ITW's slower growth trajectory compounds these valuation concerns. While its high operating margins and disciplined share repurchases are strengths, the company faces headwinds from a maturing industrial cycle and tepid demand in key markets. These factors limit its ability to justify its current valuation with robust earnings growth.

The Case for PepsiCo in 2026

For value investors, PepsiCo's discounted valuation and elevated yield create a margin of safety that ITW lacks. At 16.2 times forward earnings, PepsiCo trades at a discount to its own historical norms and to the S&P 500's average P/E of 22. This undervaluation reflects temporary challenges like input cost pressures but overlooks the company's structural advantages in global food and beverage demand.

Meanwhile, PepsiCo's 4% yield provides immediate income while offering upside potential if the market re-rates its shares toward historical averages. By contrast, ITW's lower yield and higher valuation require a more optimistic outlook on industrial demand to justify its premium.

Conclusion

PepsiCo's combination of a compelling dividend yield, discounted valuation, and strategic alignment with consumer trends makes it the superior Dividend King buy for 2026. While Illinois Tool Works remains a reliable income stock, its elevated metrics and slower growth trajectory make it a less attractive option for investors seeking both income and capital appreciation. In a market where patience and discipline are rewarded, PepsiCo's current mispricing offers a rare opportunity.