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Ray Dalio's Latest Pick Will Generate Lots of Dollars in Income Every Year

March 04, 2014 | About:
Victor Selva

Victor Selva

9 followers

Ray Dalio (Trades, Portfolio) is the founder and Chief Investment Officer of the investment firm Bridgewater Associates. The success of the hedge fund made Ray Dalio (Trades, Portfolio) 84th richest person in the world, according to Forbes. On Dec. 31, he bought PepsiCo Inc. (PEP), and holds 293 stocks in total, in a portfolio valued at $12.5 billion.

Dalio revealed owning a stake of 286,977 PepsiCo shares, worth 0.19% of his portfolio. PepsiCo has a market cap of $119.7 billion; its shares are trading currently at around $78.65 with a P/E ratio of 18.3, which is below the industry average of 19.3; a P/B ratio of 4.9, which is above the industry average of 2.41; and a P/S of 1.9, which is above the industry average of 1.21.

Billions-a-Year Business

PepsiCo is a major international producer of branded beverage and snack food products, with several brands that generate more than a billion dollars in revenue apiece. The company sells beverages and food in more than 200 countries and territories.

Pepsi announced mixed results; its fourth-quarter 2013 adjusted earnings of $1.05 beat the Zacks Consensus Estimate by 4%, but missed for revenues. The company's revenue of $20.12 billion missed estimates of $20.16 billion.

That cash allows PepsiCo to pay a 2.8% dividend. Other competitors in the industry include Coca-Cola Co. (KO) with a dividend yield of 3% and Dr. Pepper Snapple Group Inc. (DPS) with 2.95%.

Recently, PepsiCo's management announced a 15% dividend increase — to $2.62 from $2.27 a share — to be paid out in June 2014. This marks the 42nd annual dividend hike. Additionally, it plans to repurchase up to $5 billion of its shares over the next 12 months. Its dividend and stock buybacks will result in $8.7 billion in cash returns to shareholders in 2014 (35% increase from 2013).

What About Free Cash Flow?

In 2013, PepsiCo generated $9.7 billion in operating cash flow, which was $1.2 billion more than the year before. Its fixed capital investments (which are equal to the difference between capital expenditures and the proceeds from the sale of long-term assets) were $2.7 billion ($67 million more than in 2012) and interest paid net of taxes were $767 million ($36 million less than in 2012), so free cash flow rose by $1.1 billion to about $7.7 billion.

The company paid out $3.4 billion in dividends last year, giving it a 44.2% payout ratio based on free cash flow. If you look up PepsiCo's payout ratio you'll probably find that it says 52%. That's because most people use earnings as the number on which to base the payout ratio, which is the amount of dividends paid to stockholders relative to the amount of total net income of a company. Remember that earnings have a lot of noncash charges, so for an exact picture of the company's ability to pay dividends, I use cash flow.

Final Comment

In the latest report PepsiCo issued decent results. PepsiCo is increasingly investing in emerging markets. As PepsiCo has diversified and is looking to grow in other markets this growth should cushion the effects of the declining North American Beverage segment.

As we saw in this article, PepsiCo is making significant cash which will generate future dividend increases and share buybacks. This is very attractive for income investors that should be satisfied with PepsiCo's dividend. Only the compounding effect of the quarterly payouts can make you rich in the long term. So for a long-term perspective, I would advise fundamental investors to consider adding PepsiCo to their portfolios.

Hedge fund managers have also been active in the company. Paul Tudor Jones (Trades, Portfolio) has invested in it in fourth quarter 2013. Other gurus that hold positions are Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Yacktman Focused Fund (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Donald Yacktman (Trades, Portfolio), Yacktman Fund (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), John Keeley (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio).

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 5.0/5 (4 votes)

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