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Summary

  • Average annual growth of over 6% in dividends.
  • Lower payout ratio will allow the company to grow future dividends.
  • The diversification in the product mix will allow the company to enhance its revenues.

PepsiCo (NYSE:PEP) is one of the largest beverage and food companies in the world. The company sells its products in more than 200 countries and territories through its bottlers, contract manufacturers and other partners. The huge size of the company has enabled it to show massive financial strength over the past few years. Companies like PepsiCo are a preferred choice for dividend investors due to the consistent growth and strong global brand. In this article, we will look at the dividends, growth in dividends and the future prospects of the company.

Dividend Growth

PepsiCo is one of the top names in the soft drink industry around the globe. The company has grown into a huge product mix, with massive operations involved in the process. The enormous size also gave the company the necessary strength and power, even in the worst economic times. PepsiCo has been growing its dividend on a consistent basis, and the stock currently pays an annual dividend of $2.27, yielding 2.75%. Over the last year, the company paid $3.43 billion in cash dividends. The company has also performed share buybacks which accumulated to $3 billion, which takes the total capital returned to shareholders to $6.44 billion. However, the company has targeted its share buyback guidance to $5 billion for the current year, which should increase the total capital returned to shareholders. Moreover, PepsiCo also announced an increase of 35% in cash returns to shareholders in the 2014, and an extension of its $1 billion annual productivity savings targets through 2019.

Moving on to the payout ratio - the payout ratio based on free cash flows is pretty strong for PepsiCo. The company has managed to generate hefty operating cash flows with slightly increased capital expenditures to produce free cash flows of about $6.89 billion over the last year. Despite the lower free cash flows compared with industry peers, PepsiCo managed to distribute higher cash dividends to its shareholders. The company has a decent dividend performance among industry peers such as Coca-Cola Company (NYSE:KO), which is shown in the table below.

Dividends paid during the last year

Average Growth in five years

Free Cash Flows (Billions)

Cash Dividends (Billions)

Payout Ratio

PepsiCo.

$2.25

6.03%

$6.89

$3.43

49.82%

Coca-Cola

$1.12

7.5%

$7.99

$4.97

62.20%

Source: Morningstar

PepsiCo's dividend growth over the last five years falls behind Coca-Cola - however, the payout ratio of the company is lower than its peer, and gives it more room to further grow its dividends in the future. The company has shown a minimal increment of 2.98% in its capital spending - with reported capital expenditures of $2.795 billion over the last year. However, PepsiCo managed to increase its operating cash flows substantially by 14.3%, which enhanced the free cash flows of the company.

Future Growth Prospects

When companies reach their maturity levels in the growth cycles, innovation becomes a necessity to boost the profitability of the business. Hence, PepsiCo has balanced its portfolio of offerings to include nutrition and healthy offerings, along with its soft drinks expertise, which is threatened by the growing concerns of consumers about health and wellness. According to data provided by Information Resources Inc., PepsiCo holds the highest market share of 36.6% in the US retail savory snacks markets, which holds a great growth opportunity in the future. The company is also reaping huge benefits from emerging markets, with proven organic growth of 10% in the company revenues over the last year. As a result, over time, the business mix of PepsiCo will shift gradually to be more dependent toward snacks, and more heavily weighted toward developing and emerging markets in the future.

The beverage manufacturers are looking to enter the at-home carbonated drinks market in order to improve stagnating sales in the segment - PepsiCo will enter the market in May. The company is partnering with Bevyz, a European beverage system company, to generate its flavor sachets. According to the company, the global market for at-home beverage systems has the potential to grow to $260 billion, which will present a great growth opportunity for the company.

Conclusion

PepsiCo is a "must-pick" for the income as well as growth investors. The company has massive growth potential in the future, and has a proven record of financial strength over the last few years. The company also has a healthy buffer for future growth in dividends, with an announcement of a 35% increase in cash distribution for the current year. Overall, the company is diversifying and developing proficiency in different product mixes, with its inherited expertise and huge capital support.

Source: PepsiCo: A Good Dividend Pick?