PepsiCo: A Refreshing Choice for Value, Growth and Income

Feb. 3.10 | About: PepsiCo Inc. (PEP)
As PepsiCo (NYSE:PEP) embarks on its Pepsi Refresh Project you may want to consider refreshing your portfolio with PepsiCo Inc. (PEP) stock. You would have to go all the way back to 1994 to find Pepsi shares trading at 16 times earnings (red circle). In fact, since 1991 PepsiCo Inc. stock has only traded below 20 times earnings for a brief time in 1994 to early 1995.
Otherwise, as our Fundamentals-at-a-Glance historical earnings correlated graph, figure 1 below depicts, the market has historically priced this premium company at a premium price.
Figure 1. 20yr EPS Growth correlated to Price
Figure 1. 20yr EPS Growth correlated to PriceClick to enlarge
Figure 2 shows PepsiCo’s stock price at calendar year end 1994 with a PE valuation of 16.5 which is approximately in line with its current valuation of 16.2 times earnings. Figure 3 shows how PepsiCo returned to a more normal 20-plus PE ratio by year end 1995.
Figure 2. 1991 – 1994 EPS Growth correlated to Price
Figure 2. 1991 – 1994 EPS Growth correlated to PriceClick to enlarge
Figure 3. 1994 – 1995 EPS Growth correlated to Price

Figure 3. 1994 – 1995 EPS Growth correlated to PriceClick to enlarge
There could be great debate as to whether PepsiCo has deserved to trade at such a premium PE ratio for such a long time. There can be no debate, however, that it has. The historical facts speak for themselves. Therefore, we can state with confidence that PepsiCo has rarely been this reasonably priced over the past two decades.
A profitable side effect of today’s historically low valuation is a higher than normal dividend yield. At historic norms you would expect an entry level dividend rate of 1.5% to 1.75%. Today’s low valuation offers investors a 3% yield (almost double historical normal) from a dividend that has grown at 13.75% per year since calendar year 2000.
In Figure 4, we once again look at PepsiCo through the eyes of our earnings correlated Fundamentals-at-a-Glance graph and note some interesting metrics. The green line with white triangles represents a modified Benjamin Graham formula for valuing a stock. In the PepsiCo example the PE ratio for the green line equals 16.7. For perspective we have added a normal PE ratio of 20 (blue line with asterisks). From the graph you can see that PepsiCo has not been this inexpensive relative to earnings since 2000.
The light blue shaded area on Figure 4 illustrates dividends which are paid out of the green shaded area – earnings. As you can see, PepsiCo dividends have steadily increased each year.
Figure 4. 11yr EPS Growth correlated to Price
Figure 4. 11yr EPS Growth correlated to PriceClick to enlarge
In Figure 5 we show the performance that long-term PepsiCo shareholders received since 12/31/1999. On a capital appreciation basis (excluding dividends) PepsiCo shareholders earned 5.5% compounded versus a minus (-2.9%) compounded return for the S&P 500. Therefore, the so-called “lost decade” wasn’t a loss for PepsiCo shareholders.

This is even more amazing when you consider that the PE ratio for PepsiCo on 12/31/1999 was over 30; one of its historically higher valuations. The question is: How much better can shareholders fare by investing at today’s historically low valuations?
Figure 5. 11yr Dividend and Price Performance
Figure 5. 11yr Dividend and Price PerformanceClick to enlarge
In Closing
In this article, part one of a two-part series, we looked at PepsiCo from a historical perspective. Although we all know that the past does not necessarily predict the future, there is certainly much that can be learned from history. The evidence is clear: PepsiCo is historically inexpensive and offers a higher than normal current yield as a result.

Current consensus estimates expect PepsiCo to grow earnings over the next five years by 10% per year. This is consistent with their 20-year rate of growth of 9.6% (Figure 1) and only modestly lower than their growth since calendar 2000 of 12.8% (Figure 4) which included the two most recent recessions of 2001 and 2008.
In Part II we will look at PepsiCo based on future expectations. In essence, we will analyze the key factors that lead us to believe that PepsiCo’s future should be bright. Consequently, it is logical to assume that future operating success will translate into future investor success. We are especially optimistic considering our view of PepsiCo's attractive valuation, prospects for growth, and higher than normal dividend yield.

Disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Disclosure: Long PEP at time of writing.