Updated April 28, 2021 by Bob Ciura
As the saying goes, slowly and steadily 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 more than 25 consecutive years of dividend increases.
We believe the Dividend Aristocrats are the crème de la crème of the US stock market. With that in mind, we’ve compiled a list of all 65 Dividend Aristocrats along with key financial metrics like dividend yields and value for money.
You can download your free list of all 65 Dividend Aristocrats by clicking the link below:
We review all Dividend Aristocrats every year. Next, we’ll be reviewing food and beverage giant PepsiCo (PEP).
The stock offers a solid dividend yield of 2.9% and has increased its dividend for 49 straight years. The company’s dividend is very safe and the stock is suitable for risk averse income investors.
PepsiCo’s valuation isn’t a bargain right now, but it’s rarely a cheap stock due to its strong business model and steady growth. The company is unlikely to have any problems further increasing its dividend for many years to come.
Pepsi-Cola was founded in the late 1890s by Caleb Bradham, a North Carolina pharmacist. Meanwhile, Frito-Lay, Inc. was formed in 1961 from the merger of the Frito Company and the HW Lay Company. In its current form, PepsiCo came together through the merger of Pepsi-Cola and Frito-Lay in 1965.
Today, PepsiCo is a global food and beverage giant. The company has a market capitalization of $ 198 billion and annual sales of more than $ 70 billion.
Source: Investor Presentation
The business is almost evenly divided between the food and beverage segments. It is also geographically balanced between the US and the rest of the world.
PepsiCo has a large portfolio and owns many popular brands. The company’s top brands include Pepsi and Mountain Dew sodas, as well as non-fizzy drinks like Pure Leaf, Tropicana, Gatorade, and bottled water.
In addition to PepsiCo’s core beverage brands, there is also a large snacks store under the Frito-Lay brand. The company has also built a portfolio of healthier foods, including Quaker, Naked, and Sabra. The diverse portfolio has served the company well. It offers products for all tastes across the health spectrum.
PepsiCo announced Merits Results for the first quarter on April 15, 2021. Revenue improved 6.8% to $ 14.8 billion, leading the way Expectations of $ 276 million. Adjusted earnings– –Per– –The $ 1.21 stake was a 13% increase over the previous year and $ 0.09 about estimates. Organic sales increased 2.4% versus an estimate of 1.7%.
Numbers of items for foSmell and snack increased by 4% while the drink volume increased was flat. Revenue for PepsiCo Beverages North America improved by 2% although volume decreased by 3%. The Company gained market share in carbonated beverages, teas, juices and bottled water. Frito– –Lay North America’s revenue growth 3% even if the volume was 1% less. Last, Quaker Foods North America Sales increased 1% while volume decreased 4% after a very strong sales 2020.
PepsiCo has a long history of steady growth. Even in a challenging environment for soda, PepsiCo has continued to grow steadily. An example of the company’s 2013 performance can be seen in the image below.
Source: Investor Presentation
We believe PepsiCo will achieve adjusted earnings per share growth of 5% to 6% per year over the next five years. Two of PepsiCo’s most promising catalysts for the future are growth in healthier foods and beverages as well as in emerging markets.
In developed markets like the United States, where soda consumption has been steadily declining for over a decade, soda sales are slowing.
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 to healthier foods that are more responsive to changing consumer preferences.
In addition, PepsiCo offers tremendous growth opportunities in emerging markets such as China, Africa, India and Latin America. These are underdeveloped regions of the world with large consumer populations and high economic growth rates.
The emerging markets were once again a growth driver in the last quarter. revenue for the Africa / Middle East / South Asia was down 1% in the first place due to divestmentsHowever, food and snack levels were 4% higher while beverages grew 1%.
The Asia The Pacific / Australia / New Zealand / China region was PepsiCo’s top performing geographic region in the most recent quarter. growing 18% youe to middle– –double– –Digit gains in both Food and snacks and drinks. China was twice as high– –Digit percentage.
Competitive advantage and recession performance
PepsiCo has numerous competitive advantages. These include strong brands and a global scale. In total, PepsiCo has 23 individual brands, each with annual sales of at least $ 1 billion. Strong brands offer PepsiCo optimal shelf space at retailers and give the company pricing power.
PepsiCo’s financial strength also enables the company to invest in research and development as well as advertising to maintain its competitive edge.
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 on advertising each year to help maintain market share and increase brand value with consumers.
PepsiCo’s competitive advantages and strong brands enable the company to remain highly profitable even in recessions. Food and beverage always have some demand, which is why the company held up so well during the Great Recession.
PepsiCo’s earnings per share during the 2007-2009 Great Recession are shown below:
- 2007 earnings per share of $ 3.34
- 2008 earnings per share of $ 3.21, down 3.9%
- 2009 earnings per share of $ 3.77, up 17%
- 2010 earnings per share of $ 3.91, up 3.7%
As you can see, PepsiCo’s earnings per share declined only marginally in 2008. The company was able to increase earnings by almost 20% in 2009, which is very impressive. After the end of the recession, earnings continued to rise.
The company had another strong year of growth in 2020 as the coronavirus pandemic plunged the U.S. economy into recession. Hence, PepsiCo is a recession-resistant company.
Valuation and expected return
PepsiCo is projected to generate earnings per share of $ 5.82 in 2021. On this basis, the share is traded at a price-earnings-ratio of 24.5. Our estimate of fair value is a price / earnings ratio of 20. On this basis, the stock appears overvalued. Falling value for money could lower the annual return by 4.0% each year for the next five years.
As a result, future returns will likely consist of earnings per share growth and dividends. We expect PepsiCo to grow earnings per share by 5.5% each year, consisting of organic sales growth, acquisitions, moderate margin expansion and share buybacks.
Additionally, PepsiCo has a current dividend yield of 2.9%. Still, it will be difficult for the stock to break through overvaluation. The combination of valuation changes, earnings growth and dividends results in an expected total return of 4.4% per year over the next five years.
PepsiCo has a safe dividend with a forecast payout ratio of 70% for 2021. This gives PepsiCo enough headroom to keep increasing the dividend in line with the growth rate of Adjusted EPS.
While stocks trade at premium valuation, this is likely due to the company’s strong growth. Few other companies in the consumer staples sector can match their growth. Even fewer companies can match PepsiCo’s history of dividend growth. PepsiCo is only a year away from earning Dividend King status. We therefore continue to rate stocks as hold.
PepsiCo is a very strong company with a number of category leading brands. By investing heavily in new products and acquisitions, sales and earnings will likely continue to grow over many years.
Shareholders should continue to benefit from PepsiCo’s strong business through strong dividend increases. The stock is overvalued, which means value investors should wait for a more attractive entry point before buying stocks.
Still, PepsiCo remains a valuable position for a dividend growth portfolio.
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