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 two 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. Since PEP's tangible book value is not meaningful, a Graham number cannot be calculated. The stock is trading at a slight discount to its calculated fair value of $62.11. 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 (page two 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 one Star in this section for 3.) above. 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 39 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 (page two 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 $665. 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 6.8% per year, it will take four years to equal an MMA yielding an estimated 20-year average rate of 4.1%. PEP earned a check for the key metric 'Years to >MMA' since its four years is less than the five-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 (NYSE:KO) with a 2.6% yield, Dr Pepper Snapple Group Inc. (NYSE:DPS) with a 3.3% yield, and Fomento Econ (NYSE:FMX) with a 1.7% yield.
Conclusion: PEP earned one star in the fair value section, one star in the dividend analytical data section, and 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 $66.88 before PEP's NPV MMA differential decreased to the $500 minimum that I look for in a stock with 39 years of consecutive dividend increases. At that price the stock would yield 3.0%.
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 6.1%. This dividend growth rate is below the 6.8% 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. With U.S. soft drink consumption declining, PEP has turned to international markets. In February 2011, the company acquired a majority interest in a large Russian food and beverage company Wimm-Bill-Dann Foods OJSC for $3.8 billion and subsequently launched a tender offer for the remaining interest in March. PEP'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.
My concerns are PEP's growing debt as a percent of total capital and its 65% free cash flow. Both are a little above levels that I prefer. I will continue to watch PEP and add to my position when it is trading below my fair value price of $62.11 and as 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. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in PEP (1.2% of my dividend growth portfolio) and long in KO. See a list of all my dividend growth holdings here.
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