PepsiCo Inc. (PEP) announced on Tuesday that its board of directors authorized a 15.2% increase in the payment of its quarterly dividend for the second three months of fiscal 2018, from a prior dividend of 80.5 cents.
PepsiCo will pay shareholders a cash dividend of 92.75 cents per ordinary share. The dividend will be paid on June 29 to shareholders of record as of June 1. The ex-dividend date is scheduled for May 31.
Despite the announcement, which was made by the company on its website, PepsiCo stock fell 1.8% to $99.13 at the end of regular hours trading.
Starting in early February, the stock has been down trending, and it has fallen 16% so far this year. Even though we don’t know where this downtrend will finally correct, today PepsiCo is more attractive in the wake of the ongoing market slumps.
The current dividend yield of 3.26% is up 47 basis points (BPS) from its early February level and 94 BPS higher than the industry median of 2.32%. The S&P 500 current dividend yield is 1.88%.
When we have a look at the below chart, which is powered by GuruFocus, there isn’t any doubt that PepsiCo is trading cheaply. The share price is profoundly underneath the 200, 100 and 50 SMA lines. These averages have been computed over the last 52 weeks of trading when the stock has fallen 11%.
Indications of a cheap stock can also be drawn by observing patterns over the last 52 weeks of trading. PepsiCo’s share price is only 56 cents off the 52-week low and $23.40 away from the 52-week high.
Furthermore, with a Relative Strength Indicator (14 days) of 27.77, the stock is a whisper away from oversold levels, if we consider that the range is 20 to 80.
At these valuations, PepsiCo stock represents an incredible opportunity for long-term income for investors today.
PepsiCo is one of the most regular dividend payers on the market. PepsiCo’s payees have received part of the company’s quarterly free cash flow for more than 52 years. Over this span of time, its annual dividend has been increased 46 times in a row.
The company is dispersing its free cash flow to holders of common stock according to 94% of its bottom line that for full-fiscal 2018 is forecasted at $5.71 per diluted share of PepsiCo. Estimates on earnings are backed on revenue of $65.39 billion.
The payment of the dividend at PepsiCo is supported by strong financials, which are characterized by an annual capability of generating approximately $10 billion cash flow from operations. Of that, approximately 40% is used for business growth purposes and portfolio maintenance, and another 40% to pay dividends. The company has a financial burden made of long-term debt of $32.3 billion and short-term debt of $43.9 billion. PepsiCo’s business is highly leveraged when we look at the total debt-equity ratio of four times and much higher than that of its most direct peers. The industry median has a total debt-equity ratio of 0.37 times. However, in the presence of an interest coverage ratio of 8.7 times, PepsiCo is not facing problems in paying the interest expense on the outstanding debt. Which is good.
The balance sheet of PepsiCo is solid with the existence of $20.6 billion in cash on hand and short-term securities.
PepsiCo's portfolio is made up of a broad range of food and beverage products, which are consumed daily by the worldwide population. PepsiCo’s products are known in every corner of the world. These well-known brands include names such as Pepsi-Cola, Frito-Lay, Quaker, Gatorade, Doritos and Tropicana.
Other indicators on PepsiCo tell that the stock has a price-earnings (P/E) ratio of 29.24 times versus an industry average of 23.36 times. The company has a price-book (P/B) ratio of 13.03 times versus an industry median of 2.56 times and a price-sales (P/S) ratio of 2.22 times versus an industry average of 1.36 times.
According to the aforementioned ratios and to below Peter Lynch’s chart, the stock may look not so cheap as the most recent trend in the share price suggests.
However, I reiterate that the idea of investing in the common stock of PepsiCo is not really for traders but for income investors, who keep their holdings for long-term horizons. This view is also corroborated by the analysis of the following ratios.
When the Forward PE Ratio of 17.70 times is multiplied by the average quarterly weighted earnings per share of $5.82 for full fiscal years 2018 and 2019, it yields to a value of $103 per share. That value is slightly above the current share price of $99.13.
However, the average target price, as a mean of 21 ranging estimates of $105 to $137 per share, is $123.19 per share. Compared to the current market price, it tells that a 24.3% growth from current levels is possible within the following 52 weeks of trading.
What about a beyond-industry-average forward dividend yield of 3.19%?
Earnings will grow 8% annually over the next five years. The estimated growth is not one of the highest to significantly impact the market value. But it will allow long-term shareholders to benefit from a secure and regular dividend.
(Disclosure: I have no positions in any security mentioned in this article.)
