Vice-related actions can be profitable. Just ask people who have owned shares in tobacco companies. Tobacco is an addictive product and producers like Altria (MO) have been able to pay growing dividends for decades. Not all companies that offer addictive products are “sin stocks” that produce tobacco or alcoholic beverages.
Pepsi Co (NASDAQ: PEP) is best known for its caffeinated drinks like Pepsi Cola and Mountain Dew. I enjoy the citrus flavor of Mountain Dew, and there are millions of others like me who pay PepsiCo money with almost every visit to the grocery store or convenience store. Many successful investors have grown their wealth by investing in products they understand. Although a little less popular today, as people are concerned about their health, sodas (or soft drinks, depending on your location) are still cash cows. Therefore, PepsiCo could be a great option for those who want stable dividend income. The only concern at this point might be a high valuation.
Although Pepsi Cola is the flagship product, there are other drink and snack offerings that make PepsiCo money. Doritos and Lay’s potato chips are popular snacks. Additionally, Quaker Oats is a common choice for those who like to eat breakfast. Pepsi also markets Starbucks (another addictive caffeinated drink) and Gatorade. Each of these products has a diverse market and contributes to the huge revenue stream that Pepsi brings in each year.
The most recent annual report showed that the PEP more than followed the recent price spike. Net revenue for 2021 was $79.474 billion, compared to $70.372 billion the previous year. Overall, revenue increased 13% year over year. Often businesses will have additional expenses that can reduce their profits even as revenues increase. This was not the case with Pepsi over the past year. EPS was $6.26 for 2021, also representing a 13% increase. Free cash flow increased by 11%. Year-over-year net profit analysis shows profit of $9.236 billion, about 50% higher than 10 years ago, although net profit has fluctuated over this period, falling at one point (2017) below $5 billion. .
The revenue stream is well diversified, both in terms of product offerings and geography. Convenient Foods accounted for 55% of sales, overtaking beverage brands, which only contributed 45% of net sales. Those who like international diversification should also enjoy PepsiCo. The company’s international exposure allows Pepsi to sell its products worldwide. Pepsi sees 44% of its revenue coming from outside the United States.
That said, however, it is important to see that North America is the most profitable sector, with approximately two-thirds of operating profit coming from this region. About three-quarters of revenue and revenues come from North America or Europe. Indeed, when I lived in Lithuania for a few months in 2018, Pepsi had a presence there, even though it only occupied a small part of the shelf space occupied by its main competitor, Coca-Cola (KO). I was able to buy delicious Lay’s potato chips at local grocery stores.
Pepsi’s position as a staple consumer company makes it less susceptible to recession than some of the other big US companies. The following area of analysis bears witness to this: the dividend.
Dividend-focused investors should love PEP for its dividend history, if only for nothing else. The company has been paying a quarterly dividend since LBJ has been chairman. Investors have received a cash dividend from PepsiCo every quarter since 1965. Additionally, the company is poised for five decades of annual dividend growth.
It is often said that the safest dividend is the one that has just been raised. PepsiCo raised its dividend again in February 2022, and the latest increase was 7% to $4.60 per year/$1.15 per quarter. This more than matches the 7.39% average raise offered by the company over the past five years. The current yield is 2.63%, which is well above the current yield of the S&P 500 (1.58% as of August 26, 2022). Moreover, if Pepsi maintains a 7% annual dividend increase, the dividend payout will double in about 10 years, and the yield on cost would then be nearly 5.3%. Some options offer a higher yield right now, but high-yield stocks often don’t have the same robust dividend growth over time.
The current payout ratio is 67.62%, which means that PEP could continue to increase the dividend in the future provided that revenues and revenues continue to increase, even slightly, over time.
The company has also provided another means of delivering short-term shareholder returns. In February 2022, the company announced plans to repurchase up to $10 billion in stock over the next four years. In 2022 alone, PepsiCo intends to buy back $1.5 billion in stock. This could be a bad time, as a discussion of valuation should reveal.
Companies frequently buy their own shares when prices are high, which means dollars spent buying back shares buy fewer shares. Pepsi recently hit an all-time high of $180/share. Waiting for a drop to buy back shares would provide a better return to shareholders, although even buying at a high price could still benefit shareholders because fewer shares will be in the market. This helps income in several ways. First, with fewer shares in the market, EPS should be higher if all other things remain equal. Second, there will be fewer stocks that will receive dividends, which will reduce this expense. Both of these factors could be positive for the stock price.
PepsiCo is a large American company. This company has a strong stable of food and drink brands that people love to ingest. The company offers instant diversification through its international operations. Revenues and revenues have grown over the past decade, and the past year has seen even higher growth in this regard. PEP is a major boost for dividend investors, with 49 straight years of dividend growth and a yield that outperformed the S&P 500 by more than a percentage point.
However, those who view Pepsi as a value play might want to consider its relatively high P/E ratio. The company is selling at 26.36 times earnings, which is higher than the 20.50 for the S&P 500 as a whole as of August 26, 2022 (according to multpl.com). Shares of the company have just retreated from all-time highs, and PepsiCo may have little wiggle room in the near term. Additionally, if stock prices are at or near an all-time high, buyout funds will buy fewer shares in the market. However, those looking for long-term dividend growth with a decent, but not excellent, yield will likely find Pepsi a great long-term buy.