This is a guest post analyzing PepsiCo is from Ben Reynolds at Sure Dividend. Sure Dividend is focused on high quality dividend growth stocks suitable for long-term investors.
PepsiCo is one of the most easily recognized companies in the U.S. The company’s flagship Pepsi soda brand can be found in virtually every gas station, corner store, and grocery store in the U.S. In addition to the Pepsi brand, PepsiCo also own the following drink brands: Gatorade, Mountain Dew, Lipton, Tropicana, and 7 Up (among others – more on that later).
The Conservative Income Investor names PepsiCo as one of the Top 10 core holdings of a portfolio. PepsiCo ranks in the Top 10 using The 8 Rules of Dividend Investing, which ranks stocks with a 25+ year dividend history over several criteria that have historically improved investor returns or reduced risk.
PepsiCo is more than just U.S. soda. The company generates 44% of revenue outside of North America. Only about half of PepsiCo’s revenue comes from beverages. The other half comes from its portfolio of snack products which include the Frito-Lay and Quaker brands.
PepsiCo is diversified across both snack and beverage consumer brands in both North America and the rest of the world. The company’s high quality brands and multi-billion annual advertising spend have helped the company compound dividends-per-share at over 10% a year through the last decade. In total, PepsiCo has increased its dividend payments for 43 consecutive years.
PepsiCo’s Strong Brands
In total, PepsiCo has 22 brands that generate over $1 billion per year in sales. Each of the company’s 22 billion dollar brands is listed below. Brands are sorted into sparkling (carbonated) beverages, still (non-carbonated) beverages, and Snacks & Food.
PepsiCo supports its brands through strong advertising spending. The company typically spends around 6% of revenue on advertising and marketing each year. This comes to around $4 billion for full fiscal 2014.
Sparkling Beverages
- Pepsi
- Diet Pepsi
- Pepsi Max
- Mountain Dew
- Diet Mountain Dew
- 7 Up
- Miranda
- Sierra Mist
PepsiCo has 8 sparkling beverage brands that sell over $1 billion per year. Their flagship Pepsi brand is the strongest, followed by Mountain Dew. Sparkling beverage sales have stagnated in developed markets as consumers slowly switch to still beverages.
Still Beverages
- Gatorade
- Tropicana
- Lipton
- Aquafina
- Brisk
- Starbucks RTD Beverages
PepsiCo currently has 6 still beverage brands that sell $1 billion or more a year. The company owns the preeminent sports drink in the world in Gatorade. In addition, the company has a strong presence in tea with Lipton and Brisk. PepsiCo is partnered with Starbucks to offer ready-to-drink bottled and canned Starbucks brand coffee drinks to consumers. PepsiCo does not own Starbucks.
Snacks & Foods
- Lay’s
- Doritos
- Quaker
- Cheetos
- Ruffles
- Tostitos
- Fritos
- Walkers
PepsiCo’s industry leading chip brands are its biggest growth driver. In total, the company has 8 snack and food brands that generate $1 billion or more a year in sales. Most Americans are familiar with the Lay’s, Doritos, Cheetos, Ruffles, Tostitos, and Fritos brands. Walkers is popular internationally and is similar to Lay’s.
Dividend Analysis
PepsiCo currently has a dividend yield of 2.6%. The company has increased its dividend payments for 43 consecutive years, making PepsiCo a Dividend Aristocrat. Shareholders of PepsiCo are extremely likely to receive rising dividend payments each and every year for the long-run.
The company recently increased its dividend payments 7.3%. PepsiCo shareholders can expect dividend growth in the 6% to 9% a year range going forward. Over the past decade, the company grew its dividends-per-share by over 10% a year, on average. Growth will be slightly slower over the next several years as health-conscious consumers slowly switch from sparkling to still beverages.
PepsiCo’s dividend is in no danger of being cut. The company has a payout ratio of around 60%, giving it a significant cushion to continue paying dividends even if earnings fall. PepsiCo’s earnings are very stable, however. The company saw earnings-per-share fall by just 4% through the worst o the Great Recession. The company’s strong portfolio of high quality consumer food and beverage products insulates it from much of the effects of recessions.
Valuation
PepsiCo is trading near the high end of its historical valuation. The company traded for an average annual price-to-earnings ratio above 20 from 1998 through 2008. From 2008 through 2014, the company’s average annual price-to-earnings ratio was below 20. Despite being on the high side of its historical valuation, PepsiCo makes a good long-term investment for conservative dividend growth investors. The company should continue to grow earnings-per-share somewhere between 6% and 10% a year. Combined with the company’s 2.6% dividend yield, investors will likely see total returns of over 10% a year for the next several years.
Final Thoughts
PepsiCo’s strong brands and stable cash flows give it an exceptionally low stock price standard deviation. This implies the company is less risky than most stocks. Qualitatively, PepsiCo’s brands and massive marketing spending create a strong competitive advantage that makes the company very low risk. Additionally, the company has solid growth prospects internationally, as it continues to expand. PepsiCo is a shareholder friendly business with a 2.6% dividend yield and a long history of dividend growth. It has long been a favorite of The 8 Rules of Dividend Investing thanks to its low stock price standard deviation, solid growth rate, and fairly high dividend yield.
Originally posted 2015-02-23 14:22:25.
