PepsiCo: 42 And Counting

May. 7.14 | About: PepsiCo Inc. (PEP)


Food and beverage giant announces 42nd consecutive dividend increase.

This puts the yield on par at 3% with the other beverage giant, Coca-Cola.

Price target, analyst estimates and analyst reports show reasons for optimism.

PepsiCo (NYSE:PEP) announced back in February its 42nd consecutive annual dividend increase. The ex-dividend date for the new dividend has just been announced as Seeking Alpha has covered it here.

This article was written when Coca-Cola (NYSE:KO) announced its 52nd annual dividend increase. Since investors always put these giants together when evaluating their choices, this article evaluates PepsiCo with the same parameters used in the Coca-Cola article. Let us get into the details.

Current Yield: The annual dividend of $2.62/share gives PepsiCo a current yield of 3%, which puts it on par with Coca-Cola's current yield. Also, this is the average yield level over the past five years as shown in the chart below.

Click to enlarge

(Source: YCharts.Com)

Payout Ratio: The payout ratio now stands at 59%, which is lower than Coca-Cola's 65%. As with many dividend growth giants, a moderate payout ratio after decades of dividend increase shows the company's earnings prowess.

Dividend Growth Rate: In spite of the recent impressive 15% dividend increase, Pepsi's five-year dividend growth rate (DGR) stands at "just" 7.86%. Coca-Cola's five-year DGR is 8.28%. But the key difference between the two companies is the fact that Coca-Cola's dividend increases have been steady between 7% and 9% while PepsiCo has been wayward with increases between 4% and 15%.

(Source: Yahoo Finance)

Extrapolation: Just like in the Coca-Cola article, the table below assumes an annual dividend growth rate of 7%. Patient investors can still expect their yield on cost to double but with repeated questions about the onslaught on soda and junk food, some investors might look the other way soon.

(Source: Current dividend and share price data from Yahoo Finance)

What Does The Future Hold?

  • Sixteen analysts have an average price target of $92.65, which represents a 9% upside from the current level.
  • Earnings are expected to grow at 7%/year for the next five years. If this holds true, we will be looking at an EPS of $6.20 in five years. If PepsiCo maintains a payout ratio around 60%, we will be looking at an annual dividend of $3.72. That represents a 40% upside to the annual dividends/share.
  • Like Coca-Cola, PepsiCo is perhaps past its days of growth. But the company remains committed to its shareholders and like Coca-Cola is also working on massive cost-cutting efforts. The company calls it the "productivity plan" but it's plain old cost-cutting through layoffs and manufacturing efficiency.
  • As many investors like to point out, PepsiCo has the snack business to fall back on if sodas continue to face challenges. This proved right as PepsiCo's recent numbers were boosted due to Frito-Lay.
  • Analysts expect the snack business, cost-cutting and marketing to be the major factors as they expect PepsiCo to outperform Coca-Cola.

Conclusion: Investors have a reason for optimism with this better than expected dividend increase but do you think the stock is a buy here? We hold Coca-Cola and the only reason for not holding PepsiCo as well is that our portfolio hasn't expanded enough to warrant two very similar stocks. That said, this is a classical case where investors can actually buy two competing stocks and let the companies fight it out instead of fighting with each other which stock is the best.

Let's conclude the article with the same question posed in the Coca-Cola article. Consistent high single digit dividend growth seems like a realistic target for the next few years with PepsiCo as well. The big question is, will you be happy with that?

Disclosure: I am long KO.

Business relationship disclosure: The article was written by Tradevestor's analyst. Tradevestor is not receiving compensation for it (other than from Seeking Alpha). Tradevestor has no business relationship with any company whose stock is mentioned in this article.