Throughout the market downturn since the start of the year, PepsiCo (NYSE:PEP) has stayed strong. The stock is up 1% over the past year, not including dividends, while the S&P 500 is down 10% in that time. Despite all the headwinds rattling the market, including the strengthening U.S. dollar and fears of slowing economic growth in the emerging markets, PepsiCo is steady. Its recent quarterly earnings report beat analyst expectations.
Even better, PepsiCo also announced its intention to raise its dividend to $3.01 per share annualized in time for its June payout. That represents a 7% year-over-year increase, and would lift PepsiCo's effective yield to approximately 3.1% based on its February 12 closing price. For income investors looking for a stable company with strong brands, a 3% dividend yield, and high single-digit dividend growth each year like clockwork, PepsiCo fits the bill.
PepsiCo's Key Advantages
PepsiCo holds a balanced business model. In all, it has 22 brands that each collect at least $1 billion or more in annual sales. Its revenue is about evenly split between food and beverages. This diversification provides tangible benefits that, I believe, give the company an advantage. PepsiCo's food and snacks businesses deliver important leverage over retailers that provide PepsiCo's brands with optimal shelf space. This was the major reason why PepsiCo decided not to spin off its beverage unit as activist investor Nelson Peltz urged it to, and in my opinion management made the right decision.
Furthermore, PepsiCo is benefiting from higher savings at the gas pump. Consumers are pocketing thousands of dollars per household thanks to the decline in gas prices over the past year. The savings are resulting in higher sales of non-gas items at gas stations, including snacks and beverages that make up several core PepsiCo brands. This is why PepsiCo saw a 6% increase in sales at convenience stores last quarter.
PepsiCo is doing well from both a product and geographic standpoint. Overall, PepsiCo generated 5% organic revenue growth last year, which excludes foreign exchange fluctuations. Organic earnings per share were up 10% for the year. North America was a strong region for PepsiCo. Last year, both the Frito-Lay North America and North American Beverages units posted 3% organic revenue growth and 7% core constant currency operating profit growth.
And PepsiCo continues to reap strong growth from new markets. Last year, PepsiCo's international business grew organic revenue by 8% and core constant currency operating profit by 6%. The emerging markets are particularly attractive. Organic revenue in Latin America increased 20% and 4% in Asia, the Middle East and North Africa last year.
PepsiCo is a very shareholder-friendly company in the sense that it returns a great deal of its cash flow to investors through dividends and buybacks. PepsiCo expects to pay out approximately 60% of its core 2015 earnings as a dividend. It expects to return a total of $7 billion to investors in 2016 cash returns, and the company generates more than enough cash flow to meet that goal. PepsiCo produced $10.6 billion of operating cash flow and $8.1 billion of free cash flow in 2015. Return on capital was 19.6% for the year, which is a very strong number and demonstrates the strong returns generated by the core business.
Dividend Increase is Music to My Ears
Income investors like me have to be pleased with PepsiCo's dividend increase. It represents the 44th year in a row of dividend raises, which is a very impressive track record and speaks to the strength and resiliency of PepsiCo's underlying business. And PepsiCo is not as volatile as the market. While the Dow Jones Industrial Average seems to move up or down by several hundred points each day to start 2016, PepsiCo is steady-as-she-goes.
With a 3.1% yield, a modest valuation, and the potential for many years of continued dividend growth going forward, PepsiCo is an attractive dividend stock to buy and hold. PepsiCo remains a core holding for me, as it presumably does for many income investors, and I look forward to holding onto my shares for many years to come.
Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.
Disclosure: I am/we are long PEP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.