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Valuation Of PepsiCo Inc. - The Long Case Looks Strong

Feb. 21, 2014 3:58 AM ETPepsiCo, Inc. (PEP)32 Comments
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Passive Income Pursuit

Last week management of PepsiCo. Inc. (NASDAQ:PEP) announced earnings for 4Q and full year 2013. The results were fairly mixed with revenue increasing around 1% over 2012. North American soda consumption continues to be a drag on the growth of the company as international beverage and snacks show solid growth. The Board of Directors also announced a huge 15.4% increase in the quarterly dividend from $0.5675 to $0.655, although the new dividend rate doesn't start until the June payment. PepsiCo, Inc. was trading around $78.00 on Thursday, February 20th giving a forward yield of 3.36% based on the new dividend rate.

DCF Valuation:

Analysts followed by Yahoo!Finance expect PepsiCo to grow 7.86% per year over the next five years and I've assumed they can grow at 6.29% (75% of 7.86%) for the next 3 years and at 4.50% per year thereafter. Running these numbers through a three stage DCF analysis with a 9% discount rate yields a fair value price of $111.09. This means the shares are trading at a 29.8% discount to the discounted cash flow analysis.

Graham Number:

The Graham Number valuation method was conceived of by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value. PepsiCo, Inc. earned $4.32 per share in fiscal year 2013 and ended with a book value per share of $15.96. The Graham Number is calculated to be $39.39, suggesting that it is overvalued by 98.0%.

Average High Dividend Yield:

PepsiCo, Inc.'s average high dividend yield for the past 5 years is 3.27% and for the past 10 years is 2.91%. This gives target prices of $80.24 and $89.93, respectively, based on the current annual dividend of $2.62. PepsiCo is currently trading at an 8.3% discount to the average of two high dividend yield models.

This article was written by

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I started a dividend growth investment strategy a few years ago and am aggressively growing my portfolio to churn out enough dividends to reach financial independence.

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