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Refresh Your Portfolio With Some PepsiCo Inc.

Feb. 13, 2017 12:38 PM ETPepsiCo, Inc. (PEP)26 Comments
Passive Income Pursuit profile picture
Passive Income Pursuit


  • Consumer staples companies, Pepsico included, typically strike a good balance between current yield and future growth.
  • Pepsico is a Dividend Champion with 44 consecutive years of dividend growth.
  • Checking in on the quality of Pepsico, the company, through the lens of its cash flow.

For many dividend growth investors, myself included, consumer staples are one of the larger sectors within their portfolio. That's for good reason too because companies that fall under the consumer staples sector typically fall within the "sweet spot" of the yield and growth balance while also providing stability to the portfolio. Consumer staples businesses typically aren't as correlated with the health of the economy as a whole which leads to lower volatility in their operations.

A behemoth in the consumer staples sector is PepsiCo, Inc. (NASDAQ:PEP). One of the reasons that I like the business is that not only do they have diversification within the drinks sector between carbonated soft drinks, juice, tea, coffee sports drinks and much more under their control they also have exposure to some of the best selling brands in the snacks aisle. Think Lays, Ruffles, Doritos, Fritos, Cheetos and much more. PepsiCo also owns Quaker foods giving them access to the breakfast market as well.

It's been a while since I've looked at PepsiCo for a bolt on purchase to my existing position so I wanted to check up on how the company is performing as well as the valuation of the company.

Dividend History

One of the first things I look at to identify quality companies is their dividend history. Low quality companies don't just wander their way into a decades long streak of dividend increases. Rather it takes the combination of a high quality company that can protect and grow their business and a management that is willing to reward investors with cash.

PepsiCo has paid and increased dividends for 44 consecutive years giving them the title of Dividend Champion. The following chart shows PepsiCo's dividend payout history since initiating a dividend in 1972. A full screen interactive version of this chart can

This article was written by

Passive Income Pursuit profile picture
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.

Analyst’s 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.

I am not a financial professional. Please consult an investment advisor and do your own due diligence prior to investing. Investing involves risks. All thoughts/ideas presented in this article are the opinions of the author and should not be taken as investment advice. In addition to owning shares in PepsiCo I am also currently short a $104 put expiring 2/24.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (26)

Awayk profile picture
PIP - I agree with your analysis and buy-points. I picked up some PEP (1/4 position) when it dipped below $100 recently. Also bought MDLZ (1/4) and SJM (1/2) and added to HRL (now ~4/5) all for what I think are decent values. Some quick cap gains are nice but the real value in paying attention to valuation is more shares, better yield and let it compound away! MKC still eludes me but if it heads back near $90 I'll buy some because of the slow and steady growth. Thanks for all your work.
Pursuit 2 Freedom profile picture
I really like how you perform this analysis. I'm also interested in the MARR analysis. Can you tell me where I can find more details about how to calculate this exactly? I understand the big picture, but details would be nice.

About PEP, I think it's to expensive for me right now. Also, I'm in doubt if it would fit my goals. I still have 25 years to go to retirement and I'm only just beginning to build up my portfolio. PEP could function as a defensive stock, but the valuation would have to be better I think. I do like the company for it's diversity and consistent growth.
Vlae Kershner profile picture
If you buy Pepsi now and reinvest dividends, you can almost guarantee being happy you did in 25 years. It's so stable as to be almost the ultimate get-rich-slow stock.
I won't buy in at these prices. As much as I like PEP, I'm going to be buying more KO at these prices.
Passive Income Pursuit profile picture

It's definitely not a discount to fair value, but I personally see PEP's share price pretty close to the middle of the fair value range. If you're itching to get some capital to work in a high quality business then PEP is okay, but I don't blame you for wanting a better value which I think KO is offering at this time too although I do see more headwinds fro them than PEP. But that's my own take on it.
CeGe profile picture
13 Feb. 2017
I've owned Pep since 1983. It's done very well and has weathered many market scenarios. I'm still investing in it because eventually, that split is coming; and for me it will be the mother-load. Everyone has their opinion, but I'm here to tell the tale - lol. Go long and you can't go wrong.
Passive Income Pursuit profile picture

I'm sure you're looking at some excellent returns now on PEP. Unfortunately my position only dates back a few years but eventually it'll get up to 10 and then 20...
As I've stated before owning PEP has been a license to print money . Since last year when we hit 100 I've been hoping for a 3/1 or a 4/1 split because now new investors need in excess of $10,000 to buy 100 shares . Think of all the new fellow shareholders who would be able to increase our value as we go from 700 shares to 2100 or 2800 shares . The last time we had a 3/1 split the stock moved upward as many more new investors helped PEP go up,up,up .
Passive Income Pursuit profile picture

Personally I don't want to see a stock split if only for the fact that if the the share price opens up more investors and it pushes the valuation higher I won't be able to buy shares on the cheap.
Let me explain ; example ; if the stock was 99 and a 3/1 split reset the price at 33 , people who couldn't afford $99 could buy in at $33 .
these new buyers would push the stock up . let us say the stock went
to $38. The $5/share would be $15/share for those who owned before the the split. If you owned 500 shares you now owned 1500 shares and the math is on your side .
long PEP but would still like to see some effort to lower debt with interest rate hikes on the horizon
Passive Income Pursuit profile picture

As renanulrich mentioned the net debt/cash position hasn't really changed much at least over the last 5 years. See my previous reply for the numbers. So it's not quite as bad as it seems on the surface but I agree I'd like to see the debt load start moving lower.
Todd,they are doing very well with flavored waters...of all things & then you have those fabulous salty snacks. Long PEP, but hoping to buy more @ around $100.00.
Passive Income Pursuit profile picture

I'd love to the see the $100 mark although I'll likely sell puts to collect enough premium and hopefully then have shares put to me.
This is really a solid piece of analysis. I can't pick apart the author's observations on the details. My only concern is whether any company which is heavily into sugary drinks is a growth area any longer. Yes, yes, I know there are many diet versions available but many people are avoiding them too going for the "all natural" stuff. That is my sole preoccupation when considering PEP which otherwise is an exceptional company. I use their products minus the sodas. I think many people are increasingly thinking that way also.
Vlae Kershner profile picture
They should change their name to Frito-Pepsico so people won't associate them first with soda anymore.
Passive Income Pursuit profile picture

Thanks for the compliment and glad you enjoyed the analysis.

One of the reasons I like PEP to KO is because of their diversification to snacks as well as drinks. That's a big plus in my book to help combat the sugar fight.
Thanks for a good article on PEP. I've owned PEP for about 2 1/2 to 3 years, and other than the dividend, it's been pretty flat. I will continue to hold another year or two to see if it can pick up a head of steam. I like the CEO, balance sheet, strategy and vision, diversified product portfolio and the dividend. But I can't sit in limbo forever.
February 10, 2014 the price was 78.09. That's almost a 25% gain.
Passive Income Pursuit profile picture
User 286,

Personally I'm not concerned about that. If anything you should be happy the share price has just kind of sat here recently because it gives an opportunity for business fundamentals to improve, decrease the valuation and then spring the returns forward when PEP comes back in favor.

PEP is one of the largest consumer staples in the world with great product diversification. So I would need to be pretty hard pressed to give up my shares just because the share price has been flat. Several years back JNJ's share price went no where for about 2 years staying in the $50-60 range, then the market got back on JNJ and it was revalued up to $90 really quick. So just focus on the fundamentals and as long as they are still good then stick with the investment. That's my $0.02.
Ron Burgundy’s Hair profile picture
Fed bias is to raise rates & strengthening dollar.

Avoid consumer staples & beverage stocks.
brasscop profile picture
"Avoid consumer staples & beverage stocks."

I don't agree with blanket avoidance of a class of equities. It's a "market of stocks.." etc. For those with a medium to long-term horizon, there will be convincing opportunities to buy all classes of so-called interest sensitive issues including REITS and utilities. As always, individual investor needs and goals trump generalized, pan-market nostrums.
Passive Income Pursuit profile picture

A dollar that continues to strengthen is definitely a concern for the multinationals especially if they don't have adequate cash flow generation. The problem is that I have no idea if the dollar will continue to strengthen, stay here, or weaken. Everyone was piling on the bullish dollar trade at the end of 2016 and the USD had it's weakest January ever. Also the Fed was supposed to give 4 rate hikes in 2016 and we got one. So we'll see if we get the 3 they say they'll do in 2017.

All that is to say that I'm not concerned about the dollar fluctuations rather I try to focus on business fundamentals and PEP is still going strong on that front. Growth might be kind of blah while the dollar is strong/strengthening but whenever it does start to weaken those multinationals will get a tailwind in reported numbers.
Passive Income Pursuit profile picture

I have to agree with you on that one. Sectors fall in and out of favor so as an individual investor you just have to be ready to scoop up the deals du jour.
renanulrich profile picture
Thanks for the review,
But instead of looking only for the debt, look also for the cash position accumulating in the company. Net debt was fairly constant in nominal terms in the last few years, different from what happened to KO... Long PEP
Passive Income Pursuit profile picture

I do track that in my spreadsheet, but I rarely report on it because the articles are already quite long. PEP's net debt position has been fairly consistent despite the increase in debt (-$16.1 B in 2011 -$17.2 B in 2015). LTD to cash/STI is improving to 4.6 in 2011 and 2.4 for 2015. So the rising debt isn't a big burden, but if does make the FCF ROE essentially a useless metric with the capital structure changing. For consumer staples I'm okay with a more aggressive capital structure but my preference is always for a more conservative one. Also it's important to see why the company is increasing debt to make sure it's necessary and can lead to better future growth.

Thanks for the comment.
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