Who doesn't know what PepsiCo (NYSE:PEP) is? The company provides delicious beverages and snack foods to literally billions of people worldwide. The Pepsi drink itself has been around for over 110 years. It is one of the most celebrated brands in all of history, and it has crept into just about every facet of our lives. Even famous stars like Michael Jackson did a commercial for Pepsi spoofing his own work. All of this is just to go to say that this product is important to the lives of a lot of people.
PepsiCo (PEP) is a diversified company. Not only does this company provide the popular Pepsi product. Rather, it also produces Doritos, Gatorade, Aquafina, and more. These are all a list of highly successful products that this company has been bringing customers for some time. Having a variety of products that are already well liked is something that deserves a premium in today's market. That is why PEP has long traded at a premium to its earnings and expected growth rate. There is a certain amount of security that PepsiCo will continue to grow its earnings at or beyond its expected rate for many years to come. Thus, the old price to earnings versus expected growth rate that I typically attest to does not hold quite as much water here.
How To Value The Stock
The only way to accurately value PepsiCo stock is to consider its expected earnings, expected growth, dividend rate, product appeal, and recent stock price action. Combining all of these factors helps anyone to see what the real value of a company this big should be. Lets first take a look at how PepsiCo has managed to grow its earnings over the years.
There is still one quarter left worth of earnings for 2011, but the company has already created $3.18 per share in just the first three quarters. That is nearly as much as it did for the whole year in 2008!
Consistent and strong earnings growth like this is why investors flock to grab up shares of PEP.
Dividends are highly important to many investors. The benefits of reinvested dividends is undeniable. The compounding effect that this can have on anyone's stock investments is unbelievable. PepsiCo has a higher dividend yield than most of the stocks in the market, and certainly more than many stocks in the DJIA. The yield as of the close of trading on 12/15/2011 was 3.2%. That is a nice little annual return for doing nothing. It is also an amount that is likely to grow as PEP has often raised its dividend for investors. Providing an increasing dividend year after year is one of the best things that a company can do for its shareholders. PEP has a yield of 3.2% today which is likely to grow over time as the dividend per share continues to rise.
Expected Earnings Growth
Analysts expect PEP to grow its earnings at a rate of about 9% annually for the next five years. That is certainly not a bad amount of growth for a $100 billion+ company. With outreach into more international markets and a strong product line, there is no reason to believe that PepsiCo won't reach those targets. This is probably why PEP is able to trade at 14 times earnings without anything seeming to be out of line. Investors are perfectly happy to offer a slight premium on the shares in exchange for the safety and security that they provide.
Recent Price Action
Although I listed this as a factor to consider when valuing PepsiCo, I would not give it too much weight. The market is going to trade this stock at different prices mostly related to the way that the overall market is reacting. Thus, PEP is most likely to be up when the market is up and down when it is down. It is best to just try to pick up shares of the stock as soon as possible. It is currently trading somewhere between its 52 week high and its 52 week low. The ironic part is that these prices will likely not matter much 3-5 years down the road. The highs and lows will likely both be much higher. If the price where at the 52 week high, then it might be prudent to wait a while before making a purchase, but at current rates it is a buy all the way.
Get It Now, Hold It For A While
I typically recommend purchasing stocks at a certain price and then selling them at another price. That is not something I am going to do with PepsiCo. I think that this is a company that should be bought and held. The company has proven that it provides for investors both in terms of stock appreciation and increasing dividends. There is no reason to think that this will not continue to happen for years to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.