This article is about PepsiCo Inc. (NYSE:PEP) and why it's a dividend income company that is being looked at by The Good Business Portfolio guidelines in part 2. Coca-Cola Co. (NYSE:KO) was looked at in Part 1 of these articles. The question is can PepsiCo Inc. continue its growth in the snack food part of its business in the foreign markets. PepsiCo, Inc. is a food and beverage company. Fundamentals of PepsiCo Inc. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.
Good Business Portfolio Guidelines.
PepsiCo Inc. passes 11 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that keeps me ahead of the Dow average.
PepsiCo Inc. is a large-cap company with a capitalization of $153 Billion. PepsiCo Inc. is the second largest company in the soft drinks peer group and this gives PEP plenty of strength to increase its business and buy bolt on smaller companies and buy back stock. The biggest company is Coca-Cola Co. with a capitalization of $182 Billion a bit bigger that PEP.
PepsiCo Inc. has a dividend yield of 2.8% and its dividend has been increased for 43 years as a dividend aristocrat. The average payout ratio of the dividends for the past 5 years is moderate at 58% with a annual DGR of 7.5% over the last three years. PepsiCo Inc. therefore is a dividend income story. If you want constant increasing dividends then PEP is for you.
PepsiCo Inc. last quarter income was good at $1.40/share beating the estimate of $1.32/Qtr. and beat the earnings a year ago. This leaves PepsiCo Inc. enough cash flow, to pay its above average dividend and have a enough left over for its expansion of the business and stock buybacks. PepsiCo Inc. has a yearly positive total cash flow of $7.7 Billion.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income and I need 1.9% more for a yearly distribution of 5.1%. PepsiCo Inc. has a three-year CAGR of 8.0% (from Capital S&P IQ) meeting my requirement. This is very important to me since being in retirement I need a certain amount of growth that I can count on, right now PepsiCo Inc. can continue its growth trend benefiting from stressing of its snack brands like Lays potato Chips in the foreign markets.
Looking back five years $10,000 invested five years ago would now be worth over $19,900 today. This makes PepsiCo Inc. a good investment for the growth investor looking back that does pay a high current dividend meeting two key requirements, growth and income.
PepsiCo Inc. S&P Capital IQ rating is four stars or buy with a target price of $124. PepsiCo Inc. is 14% under priced at present compared to the target and good for the moderate growth investor with the dividend as a plus.
Total Return And Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. PepsiCo Inc. did much more than the Dow baseline in my 45.5 month test compared to the Dow average. I chose the 45.5. month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The total return of 68.09% makes PepsiCo Inc. appropriate for the growth investor and PEP has a 2.8% steady dividend for the income investor. YTD total return for PepsiCo Inc. is good at 6.35% above the market by 2% short term. The dividend is above average and covered by the earnings and has been paid and increased each year for 43 years. A dividend increase is expected to be declared in May 2017 by $0.05/Qtr. or 6.5%.
DOW 45.5 month total return baseline is 38.43%
45.5. Month total return
Difference from DOW baseline
Yearly Dividend percentage
AS seen in the price chart below PEP has solid straight growth over the last 5 years and provides a steady safe income stream in addition. It beats out KO by a mile.
PEP data by YCharts
Last Quarter's Earnings
For the last quarter on September 29, 2016 PepsiCo Inc. reported earnings that beat expected at $1.40 compared to expected at $1.32 and last year at $1.35. Total revenue was lower at $16.03 Billion, lower than a year ago by 1.8% year over year and beat expected revenue by $200 Million. This was a good report showing bottom line growth with decreased top line and a headwind of the strong dollar. Earnings for the next quarter are due in late December and are expected to be at $1.16 compared to $1.06 last year. This report gives a good showing for the future growth of PEP even in this strong dollar environment.
PepsiCo, Inc. is a food and beverage company. The company, through its operations, bottlers, contract manufacturers and other third parties, is engaged in making, marketing, distributing and selling a range of beverages, foods and snacks, serving in over 200 countries and territories. The company operates through six segments, namely, Frito-Lay North America (OTC:FLNA); Quaker Foods North America (QFNA); North America Beverages (NAB); Latin America, which includes its beverage, food and snack businesses in Latin America; Europe Sub-Saharan Africa (ESSA), which includes its beverage, food and snack businesses in Europe and Sub-Saharan Africa, and Asia, Middle East and North Africa (AMENA), which includes its beverage, food and snack businesses in Asia, Middle East and North Africa. The company's brands include Agusha, Amp Energy, Aquafina, Aquafina Flavorsplash, Aunt Jemima, Cap'n Crunch, Cheetos, Chester's, Chipsy, Chudo, Cracker Jack, Diet Pepsi, Diet Sierra Mist and Domik v Derevne.
The company does have a headwind of the strong dollar which will most likely get stronger when the FED raises rates. The economy is showing moderate economic (about 2%) growth right now and the FED will most likely raise rates in December 2016 depending on the United States economy.
Over all PepsiCo Inc. is a good business but is being hurt by the strong dollar. On the good side The company's business is defensive and dampens the market swings and provides steady income. They are not standing still and will soon complete a small $500 Million bolt on business buy of KeVita in the Pro-Biotics drink business. The combination of snack food that makes you thirsty and soft drinks is a great combination of products.
At the last earnings call Indr Nooyi (Chairman and CEO) said "I'm pleased to report our businesses continued to perform well in the third quarter. Specifically, we had more than 3% organic volume growth in global snacks and more than 2% organic volume growth in global beverages. While foreign-exchange translation continued to pressure our reported revenue results, we delivered more than 4% organic revenue growth, which represents an acceleration from the first half".
Takeaways and Recent Portfolio Changes
PepsiCo Inc. is an investment for the dividend income investor and moderate growth investor and will definitely be considered by The Good Business Portfolio when am open slot is available. The good past total return and future earnings growth and estimated dividend growth of 6.5% make PEP a good buy for the dividend income investor and the moderate growth investor and is much better a choice than KO. Negatives for PepsiCo Inc. is the strong dollar headwind for their foreign operations and the weak worldwide economy but is mitigated by their stock buyback program.
Increased percentage in portfolio of Ingersoll Rand (NYSE:IR) from 2.8% to 3.1% of the portfolio. IR pays 2% average dividend and is growing nicely, I want to get this company to a full 4% of the portfolio position.
Trimmed Cabela's (NYSE:CAB) from 6.3% of the portfolio to 5.6%, they have received a bid of $65.50 cash for their shares, which to me is a fair price. I want to take a bit off the table in case the deal does not go through. I also would like to deploy the proceeds to increase the dividend paying companies in the portfolio.
Increased Omega Health Investors (NYSE:OHI) from 4.5% of the portfolio to 4.8% of the portfolio, I needed a little more income and OHI will give that to the portfolio. The portfolio will fill in the open portfolio slot with Kellogg (NYSE:K) when cash is available followed by PEP when the next slot is open.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold August 50's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently above the strike price and I have moved the calls up and out. On August 10 the portfolio moved the HOG calls up and out to November 52.5's. HOG sales are weak and I will hold the calls and collect the time value.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 8.4% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.8% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio and Boeing (NYSE:BA) is 8.2% of the portfolio, therefore JNJ and BA are now in trim position with Home Depot and Altria getting close.
Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash flow from the 787 program in the third quarter of possibly $100 Million. The KC-46A refueling plane has been authorized by the Pentagon for its initial production, this will be a big step to increase Boeing's already high cash flow even more. The contract has still to be awarded, which should be soon. Looking forward I expect Boeing to beat the expected third quarter earnings of $2.63 but will not trim it until it reaches 10.0% of the portfolio. Boeing on October 6, 2016 received a $11.7 Billion order from Qatar for 30 787-9 and 10 777-300ER's planes which helps make it easier to meet year end goals. BA earnings come out October 26, 2016 and we will see what the result is.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on The Good Business Portfolio: 2016 Second-Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real time follower and you will get each quarter's performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, HOG, PM, IR, CAB.
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.