stock analysisPepsiCo, Inc. (PEP) is a major snack food and beverage company throughout the world.  They sell famous brands throughout such as Pepsi-Cola, Gatorade sports drink, Tropicana juices, Quaker, Doritos, Ruffles and Lay’s Chips.  PepsiCo is an international company in which about 30% of 2012 operating profits came internationally.  I’m a big fan of many Pepsi products and especially like the newer Doritos tacos being sold through Taco Bell.  PepsiCo is a true dividend grower as they have increased their dividend rate for 41 consecutive years.

Dividend Growth and Current Yield

PepsiCo currently pays a dividend of $0.5675 per quarter for a $2.27 annual dividend.  At the close of market on Friday, September 6th PEP’s price per share was $79.26.  This gives the stock a current dividend yield of 2.86% (2.27/79.26).  Typically I look for a dividend yield of at least 2.5% so I would be satisfied with this dividend yield from PEP.

In 2003, PepsiCo payed an annual dividend amount of $0.63 per share.  The dividend trend has been up each year as it now pays $2.27 annually per share.  This gives PEP a 10 year annual compound dividend growth rate of 13.68%.  More recently the annual dividend growth rate was 4.93% for 2011 to 2012 and 6.57% from 2012 to 2013.  The more recent dividend growth has been lower than investors would probably prefer but still greater than the rate of inflation.  PepsiCo has shown a strong commitment to it’s shareholders with their over four decades long history of increasing dividends.  As long as they continue to increase their dividend at a faster rate than inflation, shareholders should be happy.

Earnings Per Share Growth

PepsiCo had a 2002 earnings per share (EPS) of $1.96 and a 2012 EPS of $3.92.  Over the 10 years their earnings per share have been consistently climbing upward at a strong rate with only a couple down years.  PepsiCo has had a 10 year EPS growth rate of 7.18% which is an average growth rate.  More recently PepsiCo’s annual EPS growth rate was 1.79% from 2010 to 2011 and unfortunately PepsiCo saw a decrease from 2011 to 2012.  It may be a little discouraging for investors to see the recent lack of EPS growth the past couple years.  Investors may take comfort knowing that Value Line analysts project an 8.5% EPS growth rate going forward.  Time will tell if these projections bear fruit or not.

Net Income Growth

Net income has shown the same pattern as EPS from 2003 through 2012.  Net Income was 3,568,000,000 in 2003 and grew to 6,178,000,000 in 2012.  This gives PEP a compound annual net income growth rate of 6.29%.  More recently PEP showed fairly flat growth in net profits from 2010 to 2011 and a slight decrease from 2011 to 2012.  Like EPS, net profit growth lately for PepsiCo leaves a little to be desired.  Investors will want to pay special attention to PepsiCo’s earnings results going forward to make sure management gets the company back on the right track.

Sales Growth

Sales have been growing for PepsiCo over the past 10 years in a consistent uptrend as well.  The compound annual growth rate of sales revenues was 10.36%.  This could be promising for investors as the company is showing the ability to grow sales at a double digit rate.  Unfortunately the sales growth has yet to materialize itself into great net income growth.

Outstanding Shares

Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company.  Since 2002 PEP has been decreasing their share count.  In 2010 the share count increased slightly when PepsiCo acquired the Pepsi Bottling Group and PepsiAmericas.  Since that acquisition they have then continued decreasing the outstanding share count through 2012.  With less shares outstanding, the value of each share still available increases.  When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits.

Return on Equity Trend

When evaluating a company I look for return on equity to be consistently above 12%.  While PEP’s return on equity #’s have been decreasing the past few years, they are still about the 12% level.  As an investor in PepsiCo, I would look for management to stabilize return on equity numbers and begin to maintain a consistent return on equity going forward.   Maintaining a consistent return on equity would show me that management is doing a good job with shareholders investment.

Current Ratio

Current ratio measures a companies ability to meet short term obligations.  PepsiCo has a 2012 FYE current ratio of 1.10.  This means that current assets will be able to cover 110% of current liability obligations.  I generally want to see this number be above 1 which PepsiCo meets.

Net Profit to Long Term Debt

This number tells me how many years worth of profits it will take to pay off the current long term debt of the company.  I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not.  Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt.  For PEP this net profit to long term debt ratio stands at about 3.8 for 2012.  This means PepsiCo would be able to pay off all long term debt with a little less than 4 years worth of profits.  In my opinion PepsiCo does not have too much debt on their balance sheet.

Dividend Payout Ratio

The dividend payout ratio measures the dividend per share compared to the earnings per share.  How much of a companies earnings per share are they paying out to shareholders in the form of a dividend.  The past few years PEP has maintained a dividend payout ratio around 50%.  This tells me that PepsiCo is paying out around 50% of profits to shareholders and keeping 50% of profits to grow the company and increase shareholder value through share repurchases.  I like this payout ratio because it is fairly low and I don’t believe PepsiCo should have any trouble maintaining dividend growth in the future even if the company faces struggles near term.

Price/Earnings Ratio

The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason.  With the most recent closing market price of $79.26 and most recent EPS of $3.92, PEP has a current P/E right around 20.2.  Typically the market P/E average is right around 14 so compared to the market in whole I might determine PEP to be slightly over valued.  Given the slowing growth over the past two years of PEP it may seem the market is pricing PEP a little high.

Looking at PEP’s past P/E ratios of the last few years it looks like they have ranged from a high of 25 to a low of 15.  During 2010 you would have been able to pick up shares as low as 12 times earnings.  The current P/E of 20 is in the middle of the range of 15 to 25 which is the range of P/E PEP has traded the majority of time over the past decade.  Based on the companies more recent performance, I believe the current valuation to be slightly higher than I would be willing to pay.  I would expect future growth to be considerably better in order to justify paying 20 times earnings for this company.

Return Projections

PEP had EPS of $3.92 in 2012.   The past earnings per share growth rate has been roughly around 7% but we calculated a slower growth rate the most recent two years.  Therefore I am going to use a more conservative EPS growth rate of 5% over the next 10 years to figure out what 2022 EPS might look like.  This gives me an estimated EPS of $6.39 for PEP in 2022.

If PEP is trading at reasonable P/E ratio of 15 in 2022 then it will have a market price of $95.85/share (6.39*15).  This will give me an estimated annual growth rate for PepsiCo of 2.13% over the next 10 years.  If you would be happy with a 2.13% return over the next 10 years as well as collecting increasing dividends along the way then PEP may be a good investment for you.  This is a very rough exercise based on growth estimates that may not come to reality.  Actual returns in PEP will vary depending on how well the company increases their earnings and how the market values PEP in the future.

Recommendation

Based on the above analysis I believe PepsiCo to be a hold at current levels.  I think the addition of PepsiCo to a dividend growth portfolio would provide a solid blue chip company that is an industry leader in the snack and beverage markets.  I am really interested in owning PepsiCo in the future, however I don’t believe the current valuation and operating results make it a wise investment at the current time.  As far as beverage companies go, I would probably look more towards The Coca-Cola Company at the present time.

I think PepsiCo is a great company with many wonderful brands.  For those that really want to own a piece of PepsiCo, I don’t think it would turn out to be an awful investment.  I personally would prefer more of an expected return however.  Given the slower earnings growth over the past few years, I wouldn’t expect PEP to be anything more than an average investment.  Personally I am going to keep an eye on future operating results of this company before jumping in.  This is why I give PEP a hold recommendation.  They can provide a solid foundation to dividend growth portfolios but I wouldn’t expect anything more than average returns from owning this company.

Do you have an opinion on PepsiCo?  Please share your thoughts in the comments below!

Disclosure:  I do not own any shares of PEP.

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4 Responses to PepsiCo Dividend Stock Analysis

  1. I agree with your thesis, probably a hold on PEP and likely a buy on KO right now.

    Under $70, I see PEP as a buy.

    BTW – Cleaner look with the site Dan. Nice.

    Mark

    • Dan Mac says:

      Thanks for your thoughts Advisor. My actions this week will most likely resemble your thoughts as I’m thinking of adding some more KO shares to my portfolio unless I change my mind later this week and start looking at a different company. I’d like to grab some PEP to pair with my KO but don’t feel it’s the right time.

      Thanks for the comments on the sites look. All I did was update the theme and wordpress files and it came out looking like this. I’m not very tech savy so certainly doesn’t look this way because of any of my skills!

  2. […] Pepsi Co (PEP) @ Dividend Growth Stock Investing […]

  3. Manefla says:

    Thank you for the analysis. Agree with both Dan and Mark.

    I find PEP a bit pricey at the current levels.

    Some days ago I added KO at 38,5 which I think is appesling but not a bargain.

    Long PEP and KO.

    Kind regards,
    Manefla

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