Updated on April 28th, 2021 by Bob Ciura
As the saying goes, slow and steady wins the race. This phrase comes to mind when reviewing the Dividend Aristocrats, a select group of 65 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
We believe the Dividend Aristocrats are the “cream of the crop” of the U.S. stock market. With this in mind, we created a list of all 65 Dividend Aristocrats, along with important financial metrics such as dividend yields and price-to-earnings ratios.
You can download your free list of all 65 Dividend Aristocrats by clicking on the link below:
We review all the Dividend Aristocrats each year. Next up, we will review food and beverage behemoth PepsiCo (PEP).
The stock offers a solid 2.9% dividend yield, and has increased its dividend for 49 years in a row. The company’s dividend is very safe and the stock is suitable for risk-averse income investors.
PepsiCo’s valuation is not a screaming bargain right now, but it is rarely a cheap stock, due to its strong business model and steady growth. The company should have little trouble continuing to raise its dividend for many years.
Pepsi-Cola was created in the late 1890s by Caleb Bradham, a North Carolina pharmacist. Meanwhile, Frito-Lay, Inc. was formed in 1961 from the merger of Frito Company, and the H. W. Lay Company. In its current form, PepsiCo came together as a result of the 1965 merger of Pepsi-Cola and Frito-Lay.
Today, PepsiCo is a global food and beverage giant. It has a market capitalization of $198 billion, and generates more than $70 billion of annual revenue.
Source: Investor Presentation
Its business is nearly equally split between its food and beverage segments. It is also balanced geographically, between the U.S. and the rest of the world.
PepsiCo has a large portfolio, and owns many popular brands. Some of the company’s major brands include Pepsi and Mountain Dew sodas, as well as non-sparkling beverages like Pure Leaf, Tropicana, Gatorade, and bottled water.
In addition to PepsiCo’s core beverage brands, it also has a large snacks business under the Frito-Lay brand. The company has also built a portfolio of healthier foods, including Quaker, Naked, and Sabra. Its diverse portfolio has served the company well. It has products that cater to all tastes, across the health spectrum.
PepsiCo announced earnings results for the first quarter on 4/15/2021. Revenue improved 6.8% to $14.8 billion, topping expectations by $276 million. Adjusted earnings–per–share of $1.21 was a 13% increase from the prior year and $0.09 above estimates. Organic sales rose 2.4% compared to estimates of 1.7%.
Unit volumes for food and snack increased 4% while beverage volume was flat. Revenue for PepsiCo Beverages North America improved 2% though volumes were down 3%. The company gained market share in carbonated beverages, teas, juices and sparkling water. Frito–Lay North America’s revenue grew 3% even as volumes were lower by 1%. Lastly, Quaker Foods North America revenue was up 1% with a 4% decrease in volumes following a very strong 2020.
PepsiCo has a long history of steady growth. Even in a challenging environment for soda, PepsiCo has continued its consistent growth. An illustration of the company’s performance from 2013 can be seen in the below image.
Source: Investor Presentation
We believe PepsiCo will generate around 5%-6% adjusted earnings-per-share growth per year over the next five years. Going forward, two of PepsiCo’s most promising catalysts are growth in healthier foods and beverages, and in the emerging markets.
Sales of soda are slowing down in developed markets like the U.S., where soda consumption has steadily declined for over a decade.
As a result, large soda companies like PepsiCo have had to adapt to a more health-conscious consumer. To do this, PepsiCo has shifted its portfolio toward healthier foods that are resonating more strongly with changing consumer preferences.
In addition, PepsiCo has a huge growth opportunity in emerging markets like China, Africa, India, and Latin America. These are under-developed regions of the world, with large consumer populations and high economic growth rates.
Emerging markets were a growth driver once again last quarter. Revenue for the Africa/Middle East/South Asia was down 1% primarily due to divestitures, but food and snack volumes were higher by 4% with beverages growing 1%.
The Asia Pacific/Australia/New Zealand/China region was PepsiCo’s top-performing geographic region last quarter, growing 18% due to mid–double–digit gains in both food and snack and beverage. China was higher by a double–digit percentage.
Competitive Advantages & Recession Performance
PepsiCo has numerous competitive advantages. Among them, are strong brands, and global scale. In all, PepsiCo has 23 individual brands that each collect at least $1 billion in annual revenue. Strong brands give PepsiCo optimal shelf space at retailers, and give the company pricing power.
PepsiCo’s financial strength also allows the company to invest in research and development, as well as advertising, to retain its competitive advantages.
For example, PepsiCo invests billions each year in research and development, to innovate new products and packaging designs. In addition, PepsiCo regularly spends more than $2 billion each year on advertising, to maintain market share and build brand equity with consumers.
PepsiCo’s competitive advantages and strong brands allow the company to be highly profitable, even during recessions. Food and beverages always retain a certain level of demand, which is why the company held up so well during the Great Recession.
PepsiCo’s earnings-per-share throughout the Great Recession of 2007-2009 are listed below:
- 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% increase)
- 2010 earnings-per-share of $3.91 (3.7% increase)
As you can see, PepsiCo’s earnings-per-share declined only modestly in 2008. The company proceeded to grow earnings by nearly 20% in 2009, which is very impressive. Earnings continued to grow once the recession ended.
The company reported another strong year of growth in 2020, when the coronavirus pandemic sent the U.S. economy into a recession. Therefore, PepsiCo is a recession-resistant business.
Valuation & Expected Returns
PepsiCo is expected to generate earnings-per-share of $5.82 for 2021. Based on this, the stock trades for a price-to-earnings ratio of 24.5. Our fair value estimate is a price-to-earnings ratio of 20. Based on this, the stock appears overvalued. A declining price-to-earnings ratio could reduce annual returns by 4.0% each year over the next five years.
As a result, future returns will likely be comprised of earnings-per-share growth, and dividends. We expect PepsiCo to grow earnings-per-share each year by 5.5%, consisting of organic revenue growth, acquisitions, modest margin expansion, and share repurchases.
In addition, PepsiCo also has a 2.9% current dividend yield. Still, the overvaluation will be difficult for the stock to overcome. The combination of valuation changes, earnings growth, and dividends results in total expected returns of 4.4% per year over the next five years.
PepsiCo has a secure dividend, with a projected dividend payout ratio of 70% for 2021. This gives PepsiCo enough room to continue increasing the dividend at rate in-line with the growth rate of its adjusted EPS.
Shares do trade with a premium valuation, but that is likely due to the company’s strong growth. Few other companies in the consumer staples sector can match its growth. Even fewer companies can match PepsiCo’s history of dividend growth. PepsiCo is just one year away from achieving Dividend King status. As such, we continue to rate shares as a hold.
PepsiCo is a very strong business, with a number of category-leading brands. By investing heavily in new products and acquisitions, it is likely to continue growing sales and earnings for many years.
Shareholders should continue to benefit from PepsiCo’s strong business through annual dividend increases. The stock is overvalued, which means value investors should wait for a more attractive entry point before buying shares.
That said, PepsiCo remains a valuable holding for a dividend growth portfolio.