Falling carbonated beverage sales have hurt both Coca-Cola Co. (KO) and PepsiCo Inc.'s (PEP, Financial) long-term revenue growth potential, but it has also opened up a nice buying opportunity for dividend investors as yields of both companies hover around their all-time highs. Unlike Coca-Cola, however, PepsiCo has a slightly more diversified revenue base since the company makes the majority of its income from its food business.
In 2016, PepsiCo’s food business accounted for 52% of net sales. Although the company generates nearly 58% of its revenue from the U.S., it operates in more than 200 countries around the world and has plenty of room to grow its food business over the long term. The company plans to launch Quaker Breakfast Flats in more than a dozen countries around the world, and the premium bottled water brand - LIFEWTR - it launched in the first quarter has now crossed $70 million in retail sales. The company expects the brand to bring in $200 million in annual sales this year.
One of the main reasons for PepsiCo’s stock price rising just 5.5% in the last year is slow revenue growth. In the first six months of the current year, PepsiCo’s revenue was $27.759 billion, relatively flat growth compared to the $27.257 billion the company made last year. But the company’s cost-savings program helped increase its operating profit during the first half of the year to $4.923 million, up from $4.583 million last year.
Unlike Coca-Cola, which has watched its revenue steadily fall over the years, PepsiCo managed to hold on to its top line while continuously improving its operating margin by increasing productivity. PepsiCo’s revenue declined by $2.693 billion between 2012 and 2016, but its operating profit increased $673 million. The company reported organic growth of 3% during the second quarter, and the recent efforts to revamp its product portfolio as well as new product launches should help its revenue get back to the growth path.
PepsiCo paid $2.175 billion in dividends in the first half of the year, a payout ratio of nearly 63%. The company has also steadily bought back its own stock, which has helped contain its overall dividend spend. Over the past two years, PepsiCo has spent $8 billion in share repurchases and paid $8.227 billion in dividends. Total free cash flow was nearly $16 billion.
PepsiCo has long-term debt of $31.205 billion, with nearly $17 billion in cash and short-term investments. The company's second-quarter interest expense of $265 million against an operating income of $2.99 billion puts PepsiCo’s balance sheet in an extremely strong position to keep dividends flowing to investors, and keep increasing them over the next several years.
With a 2.8% yield, PepsiCo is an extremely attractive dividend investment for those who are ready to hold the stock for the long term.
Disclosure: I have no positions in the stock mentioned above and have no intentions of initiating a position in the next 72 hours.
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