PepsiCo: The Choice For Many Generations Of Dividend Investors

 |  About: PepsiCo Inc. (PEP), Includes: KO, SPY
by: Bennington Investment Ideas

PepsiCo Inc. (NYSE:PEP) is a leading snack and beverage company that is most often compared to The Coca-Cola Company (NYSE:KO). PEP and KO had gone through various incarnations of The Cola Wars. While KO is often seen as the global leader. There are numerous markets in which PEP is a clear leader. PEP had about $66.5 billion in revenue in 2011. PEP has a market capitalization of $112.7 billion and an enterprise value of $136.8 billion, suggesting some leverage. The purpose of this article is to further acquaint investors with PEP and provide some perspective on its performance.

PEP has a strong track record of paying dividends. For 2011, its payout ratio to net income was 49% and its payout to operating cash flow was just 35%. Even deducting capital expenditures from the operating cash flow would allow for a payout ratio of 56%. Even without much growth in underlying fundamentals, PEP would be able to continue to grow its dividend for a long time. Furthermore, PEP has engaged in substantial stock buybacks over the past two years.

Similar to KO, PEP has an extremely strong track record of paying dividends. PEP pays a quarterly dividend and has raised its dividend every year since 1982. PEP's estimated forward dividend yield is 3.0% based upon a closing price of $72.26 and the author's projected annual dividend of $2.178. The following table shows the estimated forward quarterly dividends, as well as the recent historical quarterly dividends.

Historical and Projected Quarterly Dividends
Type Ex-Dividend Date Quarterly Dividend ($ per share) Change on prior year
Projected 5/30/2013 0.565 5.1%
Projected 2/28/2013 0.538 4.4%
Projected 11/30/2012 0.538 4.4%
Announced 9/5/2012 0.538 4.4%
Historical 5/30/2012 0.538 4.4%
Historical 2/29/2012 0.515 7.3%
Historical 11/30/2011 0.515 7.3%
Historical 8/31/2011 0.515 7.3%
Historical 6/1/2011 0.515 7.3%
Historical 3/2/2011 0.480 6.7%
Historical 12/1/2010 0.480 6.7%
Historical 9/1/2010 0.480 6.7%
Historical 6/2/2010 0.480 6.7%
Historical 3/3/2010 0.450 5.9%
Historical 12/2/2009 0.450 5.9%
Historical 9/2/2009 0.450 5.9%
Historical 6/3/2009 0.450 5.9%
Historical 3/4/2009 0.425 13.3%
Click to enlarge

Source: Author estimates, Yahoo!Finance

This table shows a remarkable decline in dividend growth from double digits in 2009 to just middle of the road single digits. However, it should also be noted that PEP had a period of single digit dividend growth from 1998 to 2003 and then expanded again. The following graph shows the historical trailing 12-month yield and spread to the 10-year Treasury bond.

Created from data from Yahoo!Finance

This graph shows that PEP dividend yield has crept up even over the last 10 years, marking its transition to more a dividend stock and less of a growth stock. The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield.

Created from data from Yahoo!Finance

The above chart shows that PEP has underperformed its dividend increases. While the stock price has shown especially nice appreciation, especially when compared to the overall market. The dividends have really grown. This is important to recognize since a large portion of the investor's return should be coming in the form of dividends and not stock price appreciation; for example, since the S&P 500 Index Trust ETF (NYSEARCA:SPY) dipped to a flow in October 2011.

Both have recovered nicely since then, but SPY has actually outperformed with a total return around 28.2% compared to PEP's 22.8% and KO's 24.9%. However, both PEP and KO delivered larger returns from dividends. SPY provided just 2.0% compared to PEP 2.9% and KO's 2.6%. Part of the outperformance by SPY is also due to PEP and KO relatively strong performance throughout the downturn.

While a thoughtful examination of historical performance can help acquaint an investor with a stock, it does not provide much insight to future performance. It does help establish the strength and consistency of a company. Its approximate 30 years of dividend increases should give comfort to many investors. Digging a little deeper into the fundamentals shows PEP to have a trailing P/E ratio of 19 and a forward P/E ratio of 16.4x based on a $4.41 EPS for 2013.

Both measures are a little richer than the SPY as a whole. On a cash flow basis, one can compare the $6.4 billion in operating cash flow less capital expenditures with interest added back against the $136.8 billion of enterprise value. This ratio is also a pretty high 21.4x. There seems to be increasing noise around rising valuations of quality dividend stocks. Over the past few years, uncertainty and volatility in financial markets have pushed many investors to seek increased safety, often in the form of treasury bonds, but also in the form of dividend stocks. This type of demand can create higher valuations and ultimately higher risk for investors as markets evolve. So while PEP is a solid company, you are paying a price for its historical track record.

Disclosure: I am long SPY.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.