Dividend Aristocrats In Focus: PepsiCo

Up to date on April twenty eighth, 2021 by Bob Ciura

Because the saying goes, gradual and regular wins the race. This phrase involves thoughts when reviewing the Dividend Aristocrats, a choose group of 65 firms within the S&P 500 Index, with 25+ consecutive years of dividend will increase.

We imagine the Dividend Aristocrats are the “cream of the crop” of the U.S. inventory market. With this in thoughts, we created a listing of all 65 Dividend Aristocrats, together with essential monetary metrics akin to dividend yields and price-to-earnings ratios.

You’ll be able to obtain your free checklist of all 65 Dividend Aristocrats by clicking on the hyperlink under:

We assessment all of the Dividend Aristocrats every year. Subsequent up, we’ll assessment meals and beverage behemoth PepsiCo (PEP).

The inventory affords a strong 2.9% dividend yield, and has elevated its dividend for 49 years in a row. The corporate’s dividend could be very secure and the inventory is appropriate for risk-averse revenue buyers.

PepsiCo’s valuation will not be a screaming discount proper now, however it’s not often an affordable inventory, resulting from its sturdy enterprise mannequin and regular development. The corporate ought to have little hassle persevering with to lift its dividend for a few years.

Enterprise Overview

Pepsi-Cola was created within the late Nineties by Caleb Bradham, a North Carolina pharmacist. In the meantime, Frito-Lay, Inc. was fashioned in 1961 from the merger of Frito Firm, and the H. W. Lay Firm. In its present kind, PepsiCo got here collectively on account of the 1965 merger of Pepsi-Cola and Frito-Lay.

As we speak, PepsiCo is a worldwide meals and beverage large. It has a market capitalization of $198 billion, and generates greater than $70 billion of annual income.

Supply: Investor Presentation

Its enterprise is sort of equally cut up between its meals and beverage segments. Additionally it is balanced geographically, between the U.S. and the remainder of the world.

PepsiCo has a big portfolio, and owns many common manufacturers. A few of the firm’s main manufacturers embrace Pepsi and Mountain Dew sodas, in addition to non-sparkling drinks like Pure Leaf, Tropicana, Gatorade, and bottled water.

Along with PepsiCo’s core beverage manufacturers, it additionally has a big snacks enterprise underneath the Frito-Lay model. The corporate has additionally constructed a portfolio of more healthy meals, together with Quaker, Bare, and Sabra. Its various portfolio has served the corporate properly. It has merchandise that cater to all tastes, throughout the well being spectrum.

PepsiCo introduced earnings outcomes for the first quarter on 4/15/2021. Income improved 6.8% to $14.8 billion, topping expectations by $276 million. Adjusted earnings–per–share of $1.21 was a 13% enhance from the prior yr and $0.09 above estimates. Natural gross sales rose 2.4% in comparison with estimates of 1.7%.

Unit volumes for food and snack elevated 4% whereas beverage quantity was flat. Income for PepsiCo Drinks North America improved 2% although volumes have been down 3%. The corporate gained market share in carbonated drinks, teas, juices and glowing water. Frito–Lay North America’s revenue grew 3% at the same time as volumes have been decrease by 1%. Lastly, Quaker Meals North America income was up 1% with a 4% lower in volumes following a really sturdy 2020.

Progress Prospects

PepsiCo has a protracted historical past of regular development. Even in a difficult atmosphere for soda, PepsiCo has continued its constant development. An illustration of the corporate’s efficiency from 2013 may be seen within the under picture.

Supply: Investor Presentation

We imagine PepsiCo will generate round 5%-6% adjusted earnings-per-share development per yr over the subsequent 5 years. Going ahead, two of PepsiCo’s most promising catalysts are development in more healthy meals and drinks, and within the rising markets.

Gross sales of soda are slowing down in developed markets just like the U.S., the place soda consumption has steadily declined for over a decade.

Consequently, massive soda firms like PepsiCo have needed to adapt to a extra health-conscious client. To do that, PepsiCo has shifted its portfolio towards more healthy meals which are resonating extra strongly with altering client preferences.

As well as, PepsiCo has an enormous development alternative in rising markets like China, Africa, India, and Latin America. These are under-developed areas of the world, with massive client populations and excessive financial development charges.

Rising markets have been a development driver as soon as once more final quarter. Income for the Africa/Center East/South Asia was down 1% primarily resulting from divestitures, however meals and snack volumes have been larger by 4% with drinks rising 1%.

The Asia Pacific/Australia/New Zealand/China area was PepsiCo’s top-performing geographic area final quarter, rising 18% due to mid–double–digit beneficial properties in each meals and snack and beverage. China was larger by a double–digit proportion.

Aggressive Benefits & Recession Efficiency

PepsiCo has quite a few aggressive benefits. Amongst them, are sturdy manufacturers, and world scale. In all, PepsiCo has 23 particular person manufacturers that every accumulate at the very least $1 billion in annual income. Sturdy manufacturers give PepsiCo optimum shelf area at retailers, and provides the corporate pricing energy.

PepsiCo’s monetary power additionally permits the corporate to put money into analysis and improvement, in addition to promoting, to retain its aggressive benefits.

For instance, PepsiCo invests billions every year in analysis and improvement, to innovate new merchandise and packaging designs. As well as, PepsiCo commonly spends greater than $2 billion every year on promoting, to take care of market share and construct model fairness with shoppers.

PepsiCo’s aggressive benefits and robust manufacturers enable the corporate to be extremely worthwhile, even throughout recessions. Meals and drinks at all times retain a sure degree of demand, which is why the corporate held up so properly throughout the Nice Recession.

PepsiCo’s earnings-per-share all through the Nice Recession of 2007-2009 are listed under:

• 2007 earnings-per-share of $3.34
• 2008 earnings-per-share of $3.21 (3.9% decline)
• 2009 earnings-per-share of $3.77 (17% enhance)
• 2010 earnings-per-share of $3.91 (3.7% enhance)

As you’ll be able to see, PepsiCo’s earnings-per-share declined solely modestly in 2008. The corporate proceeded to develop earnings by almost 20% in 2009, which could be very spectacular. Earnings continued to develop as soon as the recession ended.

The corporate reported one other sturdy yr of development in 2020, when the coronavirus pandemic despatched the U.S. economic system right into a recession. Subsequently, PepsiCo is a recession-resistant enterprise.

Valuation & Anticipated Returns

PepsiCo is anticipated to generate earnings-per-share of $5.82 for 2021. Based mostly on this, the inventory trades for a price-to-earnings ratio of 24.5. Our truthful worth estimate is a price-to-earnings ratio of 20. Based mostly on this, the inventory seems overvalued. A declining price-to-earnings ratio may cut back annual returns by 4.0% every year over the subsequent 5 years.

Consequently, future returns will possible be comprised of earnings-per-share development, and dividends. We count on PepsiCo to develop earnings-per-share every year by 5.5%, consisting of natural income development, acquisitions, modest margin growth, and share repurchases.

As well as, PepsiCo additionally has a 2.9% present dividend yield. Nonetheless, the overvaluation will likely be tough for the inventory to beat. The mix of valuation adjustments, earnings development, and dividends ends in complete anticipated returns of 4.4% per yr over the subsequent 5 years.

PepsiCo has a safe dividend, with a projected dividend payout ratio of 70% for 2021. This offers PepsiCo sufficient room to proceed growing the dividend at fee in-line with the expansion fee of its adjusted EPS.

Shares do commerce with a premium valuation, however that’s possible because of the firm’s sturdy development. Few different firms within the client staples sector can match its development. Even fewer firms can match PepsiCo’s historical past of dividend development. PepsiCo is only one yr away from attaining Dividend King standing. As such, we proceed to fee shares as a maintain.

Ultimate Ideas

PepsiCo is a really sturdy enterprise, with quite a few category-leading manufacturers. By investing closely in new merchandise and acquisitions, it’s more likely to proceed rising gross sales and earnings for a few years.

Shareholders ought to proceed to profit from PepsiCo’s sturdy enterprise by way of annual dividend will increase. The inventory is overvalued, which implies worth buyers ought to await a extra engaging entry level earlier than shopping for shares.

That stated, PepsiCo stays a worthwhile holding for a dividend development portfolio.