Friday, June 7, 2013

PepsiCo (PEP) - A great dividend stock for long-term investors

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend aristocrat which has increased distributions for 41 years in a row. The most recent dividend increase was in February 2013, when the Board of Directors approved a 5.60% increase in the quarterly dividend to 56.75 cents/share.

PepsiCo’s largest competitors include Coca Cola (KO) and Dr Pepper Snapple Group (DPS).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.60% to its loyal shareholders.


The company has managed to deliver an average increase in EPS of 7.40% per year since 2003. Earnings growth has been almost non-existent since 2009 however. Analysts expect PepsiCo to earn $4.39 per share in 2013 and $4.77 per share in 2014. This would be a nice increase from the $3.92/share the company earned in 2012. Over the past decade, PepsiCo has consistently managed to repurchase 1.10% of its outstanding shares every year, on average.

PepsiCo has recognized that carbonated drink sales are not going to grow significantly in the future, which is why it has focused on fast growing non-carbonated soft drinks. The company’s innovation in the area has been successful with the introduction of Aquafina , Gatorade and Propel, Lipton teas and Tropicana. Pepsi has also started to emphasize on health and wellness, and has worked to minimize the amount of trans fats in its snack foods. Future earnings growth could also come from synergies associated with the acquisitions of its bottlers, streamlining of operations and cost cutting. The distribution networks of the bottlers acquired could be used to push some of PepsiCo’s non-beverage products such as snacks and other foods. Earnings growth could also come from strategic acquisitions, as well as product innovations in health and wellness food and beverage section. In 2011, PepsiCo acquired the leading Russian food and beverage company Wimm-Bill-Dann (WBD), in an effort to position itself in the growing emerging market in Russia and to build its nutrition business.

PepsiCo is also undergoing a strategic initiative in order to cut costs by $3 billion through 2014. In addition, the company is heavily investing in its brands in North America, by increasing advertising budgets. The company is also increasing prices in its products in order to offset inflation costs. These price hikes could make consumers more resistant to PepsiCo’s products.

The company has a high return on equity, which has remained above 30%, with the exception of a brief decrease in 2005 and 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13.60% per year since 2002. A 14% growth in distributions translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1965, we see that PepsiCo has actually managed to double its dividend every five years on average. Dividend growth has slowed down over the past few years, mostly due to flat earnings since the end of the financial crisis.

Over the past decade the dividend payout ratio has increased from 30% in 2003 to 54% in 2012.. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, PepsiCo is fully valued at 20.70 times earnings, yields 2.70% and has a sustainable dividend payout. In comparison Coca Cola (KO) yields 2.70% and trades at a P/E of 20.90.

Full Disclosure: Long PEP and KO

Relevant Articles:

Dividend Aristocrats List
The World’s Best Dividend Portfolio
Most Widely Held Dividend Growth Stocks
Sixteen Great Dividend Champions on Sale
Best Dividend Stocks for 2013, and beyond

3 comments:

  1. DGI, I assume that 2 things hold back DPS from your consideration, but correct me if I am wrong: the mostly domestic nature of the company and the relatively short history of dividend payments. With them repurchasing some rights to non-carbonated drinks in Asia, they may be in the early innings of a great dividend growth story. Thoughts?

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  2. read your column daily - love it. We have similar goals but your a lot younger. You stated that PEP was selling at p/e of 20.70. That is high but I checked it in several places and before the bell today the P/E is 21.15 or there abouts. First why is this? Second, isn't that a bit pricy @ 83.00 considering the 52 week high of 84.78. I think Pep is a great addition to almost any portfolio -although I own KO - I still want to buy PEP but the price needs to come down quite a bit. Things are getting pretty "hairy" these days and just about anything can happen. If you don't believe me ask Murphy. He'll tell 'ya! Let me thank you for your work I value it.

    Richard

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  3. Hi Anon,

    I have looked at DPS, and they look interesting. They also look cheaper than KO and PEP. I might do a more thorough look at it, before buying anything. Thanks for the tip.

    Sept2749,

    I think the PE difference is because I posted the article on Friday, but I had scheduled it for posting a few days prior to that. Also, a P/E variance of 0.40 is pretty immaterial.

    The stock is above the high range I am willing to pay for it. I don't mind holding however - in 10 - 20 years the stock will be worth much more, and pay much more in dividends. Ideally, if the stock were in the 60s, it would be a great addition. I would also like KO in the low to mid 30s.

    Thank you all for reading. I appreciate your time for writing your comments!



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