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PepsiCo (PEP): a consistent dividend aristocrat

March 23, 2010 | About:
Most dividend investors require consistency from their stock positions. As a result companies which are able to generate rising dividend income over time are viewed more favorably in comparison to companies such as Pfizer (PFE) or General Electric (GE), which have followed an inconsistent dividend policy over the past two years.

Just last week General Electric (GE) forecasted that there is a high chance for a dividend increase in 2011, coupled with a resumption of the company’s stock buyback plan and retirement of the company’s preferred stock. General Electric (GE) has had a pretty terrible timing of its share buyback plan over the past decade. The company spent billions between 2005 and 2007 repurchasing 513 million shares when prices were high. By 2009 the company had issued 517 million shares at much lower prices, in order to obtain liquidity in the wake of the global financial crisis. If the company does start increasing dividends in 2011 however, this could be a bullish sign. It would take at least a decade of consistent dividend raises however in order for the dividend to reach its previous levels of 31 cents/share.

Compare this to the consistency of PepsiCo, Inc. (PEP), which manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. Last week the company announced a 7% increase in its quarterly dividend to 48 cents/share. This is the thirty-eight consecutive annual dividend increase for this dividend aristocrat. The company's Board of Directors also authorized the repurchase of up to $15 billion of PepsiCo common stock through June 2013. The stock currently yields 2.90%. Check my analysis of the stock. Dividend author Dave Van Knapp has included the company in his most recent book "The Top 40 Dividend Stocks for 2010". The company is also one of the Best Dividends Stocks for the Long Run.

PepsiCo (PEP) is a reliable dividend stock, which is attractively priced at the moment despite its forward yield of 2.90% being a tad lower than my entry requirement of 3%. My ideal entry price at PepsiCo would be $64, for those investors waiting for better prices. Investors have to weigh in the risks of waiting for a better price, versus the risk of missing out completely on any upside action if the company doesn’t go below $64/share.

Full Disclosure: Long PEP


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Rating: 5.0/5 (2 votes)

Comments

kfh227
Kfh227 premium member - 4 years ago


PEP and KO are both good companies. Both are not trading at a discount though.

KO was a better business prior to the purchase of bottling. I hope KO grows over time via share buybacks and does not buy food comapnies.

PEP though does have some good brands in the snack area. So it's not a bad thing. Just different.

Either way, no discount to IV ... no buying for me.
dealraker
Dealraker - 4 years ago
kfh,

I love your stuff here so take this with a grain of salt.

I totally disagree with you on Coke and Pepsi.

Let's write back on this subject 5 years from now. Remember, it is relative to Mr. Market at the present time for a yes or no summary 5 years out.
cm1750
Cm1750 premium member - 4 years ago
I bought PEP in January as part of a blue chip basket. As Dealraker said, PEP may not be dirt cheap, but the risk-adjusted projected return is darn good even after its recent run.

Per GMO's latest 7-year forecast (go to website - free registration), blue chips are the only "free lunch" out there and should return a nominal 9% return over the next 7 years.

Even at its $67 price, PEP should provide roughly a 14% total IRR (incl. 2.9% dividend) for the next 3 years - this assumes 19.5x 2013 FCF/share or 16.5x 2013 EPS of $5.58, giving you a $92 price.

Given investment grade 5-year bonds are yielding about 5%, PEP looks quite attractive if you think of it as a perpetual bond. With a current FCF yield of 5.2% and adding perpetual FCF growth of roughly 4.5% (pricing + global unit growth + some operating leverage) gives you almost 10% for the next 10+ years assuming people continue to eat and drink (a pretty safe bet).

I am planning to add more blue chips (PG, CLX, NSRGY, PM etc.) on market dips as they should do well even in a slow-growth global economy.

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