Fair Value: I consider 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 discount to 1.) and 3.) above. The stock is trading at a slight discount to its calculated fair value of $64.84. PEP earned a Star in this section since it is trading at a fair value.
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 38 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)? 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 $605. 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 6.5% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.4%. 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 and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: The Coca-Cola Company (KO) with a 2.8% yield, Dr Pepper Snapple Group, Inc (DPS) with a 2.7% yield and Fomento Econ (FMX) with a 1.2% yield.
Conclusion: PEP earned one Star 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 four Stars. This quantitatively ranks PEP as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $68.49 before PEP’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 38 years of consecutive dividend increases. At that price the stock would yield 2.76%.
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 5.9%. This dividend growth rate is below the 6.5% 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 stable end markets, strong cash flows and leading global market positions. Unlike KO, the majority of PEP’s revenues come from non-carbonated soft drinks with beverages accounting for less than 50% of total revenue. Additionally, over 60% of the company’s beverage sales come from non-carbonated brands like Gatorade and Tropicana. PEP’s diverse portfolio can mitigate the impact of poor conditions in any one of its markets. In addition, its exposure to strong international markets should offset to any domestic short-falls. I will continue to add to my PEP position when it is trading below my fair value price of $64.84 and as my allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.
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. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in PEP (1.7% of my Income Portfolio), and also long in KO. See a list of all my income holdings here.
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