Company Description: PepsiCo, Inc. is a major international producer of branded beverage and snack food products.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
PEP is trading at a premium to all four valuations above. Since PEP's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 6.5% premium to its calculated fair value of $91.14. PEP did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
PEP earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. PEP earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1952 and has increased its dividend payments for 42 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
PEP earned a Star in this section for its NPV MMA Diff. of the $620. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PEP has. If PEP grows its dividend at 6.9% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 2.98%. PEP earned a check for the Key Metric "Years to >MMA" since its 3 years is less than the 5-year target.
Memberships and Peers: PEP is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Coca-Cola Company (KO) with a 2.9% yield, Dr Pepper Snapple Group, Inc. (DPS) with a 2.3% yield and Fomento Econ (FMX) with a 3.7% yield.
Conclusion: PEP did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks PEP as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $104.15 before PEP's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 42 years of consecutive dividend increases. At that price the stock would yield 2.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.2%. This dividend growth rate is lower than the 6.9% used in this analysis, thus providing a margin of safety. PEP has a risk rating of 1.25, which classifies it as a Low risk stock.
PEP enjoys relatively stable end markets, predictable cash flows and strong global market positions. Long term the company will have to focus on international markets for growth, with Frito-Lay's North America division driving profit growth in this region. The company's diverse portfolio can mitigate the impact of poor conditions in any one of its markets. PEP's direct store delivery system allows it to leverage its impressive portfolio of brands. Its focus on health and wellness should continue to drive sales.
The company has had an excellent run with positive earnings and revenue surprises in the first three quarters of 2014. PEP has raised earnings guidance twice this year reflecting its strong year-to-date performance and an optimistic outlook for the remainder of the year. Pepsi now projects earnings per share to increase 9% year over year, in line with management's long-term goal of high single-digit core constant currency earnings growth.
Since I last reviewed PEP in June 2014, debt as a percent of total capital is flat at 58%, and free cash flow payout is down to 56% from 62%. PEP's latest dividend increase brought the stock's valuation in line with its market price, with a calculated fair value of $91.14. I will monitor the stock closely and add to my position as opportunities and my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion.
Disclosure: At the time of this writing, I was long in PEP (1.9% of my Dividend Growth Portfolio), and long KO. See a list of all my dividend growth holdings here.