PepsiCo: Dividend Stock Analysis

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide.

PepsiCo is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. PepsiCo has been consistently increasing its dividends for 36 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a 4.70% annual average total return to its shareholders.

At the same time company has managed to deliver a 9.90% average annual increase in its EPS since 1999.

The ROE has remained largely between 31% and 38%, with the exception of 2004, when it fell to as low as 22%.

Annual dividend payments have increased by an average of 13.50% annually since 1999, which is much higher than the growth in EPS. Analysts are expecting slight increase in EPS for 2009 compared to 2008, given the sluggish state of North American economies. The strong US dollar could potentially hurt sales, as over 44% of PepsiCo’s revenues are derived internationally.

A 13.50% growth in dividends translates into the dividend payment doubling almost every five years. Since 1978 PepsiCo has actually managed to double its dividend payment every six years on average.

The dividend payout has remained in a range between 31% and 42%. In 2008 the dividend payout ratio has surged to 51%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.

PepsiCo is currently attractively valued. The stock trades at a price/earnings multiple of 15, has an adequately covered dividend payout and the current dividend yield at 3.50%, which is above the minimum threshold that I have set.

Disclosure: Author is long PEP

Comments

[prudentinve...:]

You state: "PepsiCo is currently attractively valued. The stock trades at a price/earnings multiple of 15, has an adequately covered dividend payout and the current dividend yield at 3.50%, which is above the minimum threshold that I have set."

I agree it seems attractive. But:

(a) How much of their profits come from selling water in plastic bottles? I suspect that the trend of buying bottled water is going to be replaced with the more economically and environmentally sound practice of filling your own container with clean tap water. Incidentally, before the era of The Great Bubbles began in the mid-90's, most people had never purchased bottled water, and it is now increasingly recognized as no better than tap water, as well as wasteful in energy, plastic, and water usage.

(b) Your long-term price chart shows the stock at levels first reached around 2001/2002 well into the era of the Great Bubbles. There are many stocks in areas such as chemicals (eg. DD, EMN, PPG) and big pharma (eg BMY, PFE, MRK, GSK, AZN, NVS) that have recently been trading at pre-bubble or early bubble prices, first reached in the 1980's to the mid-1990's; and most pay higher dividends than PEP. These stocks are suffering from the recent downturn and healthcare policy unknowns, but my guess is that they represent better long term appreciation and dividend income than companies selling highly discretionary items like soda and bottled water.

(disclosure: own shares in all examples listed)

Mar 14 12:03 PM

[Sonia:]

PEP also owns and profits from FritoLay. People aren't going to give up inexpensive discretionary items such as potato chipa and Doritoes. The kids I see everywhere are carrying bottled water - and no, I don't think they're refilling the bottles from the tap (I do, my grandchildren don't.) PEP is one of my stable of stalwart horses to ride for years to come.

Mar 15 01:58 PM