Dividend Aristocrats

Analyze Pepsico Stock & 47 Year Dividend History

Pepsico Stock is a member of the prestigious S&P 500 Dividend Aristocrats. Pepsico has rewarded investors by consistently raising dividends for 47 years, without missing even one. This record is truly remarkable and shows management’s commitment to rewarding shareholders with dividend raises every year.

In this article, we provide a business synopsis of Pepsico Stock, analysis of latest financials, review top selling brands and compare long term performance versus the S&P 500 and the Consumer Staples (XLC) sector.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

PepsiCo is a global behemoth in the food and beverage industry owning 22 brands that each generate at least $1 billion in annual sales (2018 calendar year). PepsiCo Stock has 6 reportable business segments including:

  1. Frito Lay North America
  2. Quaker Foods
  3. North America Beverages
  4. Latin America
  5. Europe & Sub-Saharan Africa (ESSA)
  6. Asia, Middle East & North Africa (AMENA).

PepsiCo earned $64.661 billion in revenues in 2018 versus $63.525 billion in 2017, a 2% organic growth. The company earned $10.62 billion in operating profits, implying an operating margin of 16.4%.

Serving customers in more than 200 countries worldwide, PepsiCo trades on the NASDAQ stock exchange and sports a market capitalization of $190.1 billion as of October 2019.  The current dividend yield is 2.8%, higher than the dividend yield provided by the S&P 500 which stands at 1.96%.

In its 2018 annual report to investors, management provides a breakdown of total revenues by each business segment.

  • Top revenue generating business is North America Beverages (NAB) totaling $21.072 billion selling brands like Mountain Dew, Pepsi Cola, Tropicana, Mug Root Beer, Lipton and Brisk.
  • Biggest margin generating business is Frito Lay North America which earned $5.008 billion in operating profit. This is double the operating profit earned by North America Beverages at $2.276 billion.

Pepsico Stock 2018 Revenues and Operating Profits

We crunched the numbers from 2018 annual report for operating profits by each business segment. Frito Lay is #1 with a whopping 31% operating margin while Quaker Foods comes in 2nd place with a 26% operating margin. The least profitable business is North America Beverages with just 11.2% operating margin.

Pepsico Revenues by Segment 2016 to 2018

Pepsico Division Operating Profits

Growth Outlook

In its 3rd Quarter 2019 results, Pepsico generated $17.188 billion in revenues and earned operating profits of $2.855 billion. This is a 4.3% organic revenue growth from the same period last year (3rd Quarter, 2018) when revenues were $16.485 billion and operating profits were $2.844 billion.

Pepsico management plans to stick with its previous guidance of rewarding shareholders with $3 billion in share repurchases and $5 billion in dividends for 2019 calendar year.

Long term goals set by management are organic revenue growth between 4% to 6% annually, and 9% earnings per share growth. Since 2012, PepsiCo has increased operating margins by 1.6%.

We expect PepsiCo to be able to deliver a 9% earnings per share growth annually for the next 5 years. The reason is PepsiCo Board of Directors announced a $15 billion share repurchase program in February 2018 through to June, 2021. This averages to share repurchases of about $5 billion a year. As share count decreases, the earnings per share rises.

The company is also making acquisitions which give to a rise in revenues. Pepsico made 3 acquisitions in 2018; the largest being SodaStream for $3.2 billion. SodaStream turns tap-water in to flavored sparkling beverages that provide healthier alternative to carbonated soft drinks.

In December 2019, PepsiCo acquired BFY brands; maker of air popped snacks like protein and veggie chips that are gluten free and made from non-GMO corn. In July 2019, Pepsico acquired Pioneer Foods Group; a maker of Sasko flour, Weet-Bix cereals, fruit juices and rices for $1.7 billion. This transaction adds $1.45 billion in revenues to Pepsi’s bottom line.

Brands Owned by PepsiCo

Pepsi Cola

Pepsi Cola is PepsiCo’s original carbonated soft drink that was invented by Caleb Bradham in 1893. Pepsi Cola stands for the term “digestion” in Greek. Pepsi Cola was invented to aid in stomach digestion and to improve energy levels in drinkers. Today, Pepsi Cola is the company’s top selling sports drink with annual sales in excess of $20 billion for the last brand level reported sales in 2011.

Sold across 200 countries worldwide, Pepsi Cola is the 2nd most popular soft drink in the world, just behind Coca Cola. Pepsi Cola is sold in various flavors including Wild Cherry, Zero Sugar, Diet Pepsi, Real Sugar, Ginger Cola, etc.

Mountain Dew

Mountain Dew is a carbonated soft drink that PepsiCo acquired from Tip Corporation in 1964 and has a citrus flavor mixed with caffeine. The company has grown the portfolio of Mountain Dew products to include Mountain Dew Kickstart juices offered in Original Dew, Black Cherry and Orange Citrus flavors, Diet Mountain Dew as well as the Original Mountain Dew.

This brand is one of the most popular products sold by PepsiCo with reported 2011 sales at $7 billion. 2011 is the last year PepsiCo reported sales by brand. Mountain Dew is PepsiCo’s 3rd top brand just behind Lays and Pepsi-Cola.

Tropicana

Tropicana is a brand that PepsiCo acquired in 1998. It was originally founded by an Italian immigrant named Anthony Rossi in 1947. Tropicana makes 100% pure squeezed orange juice beverages that are sourced from farms in Florida and Brazil. The company has various product lines including Pure Premium drinks that include Calcium + Vitamin D, Pulp, Orange Tangerine, Orange Pineapple or Red Grapefruit.

Premium drinks also include brands like Strawberry Peach, Watermelon, Lemonade, etc. Tropicana Essentials is another brand that serves healthy probiotics in its drinks including Apple Cherry, Mango Lemonade, Peach Passion, etc. In 2011, Tropicana generated $6 billion in annual revenues. Tropicana is PepsiCo’s 5th top brand just behind Gatorade, Mountain Dew, Lays and Pepsi-Cola.

Lays

Lays was founded in 1961 originally as the Frito Company with a marketing slogan that became very popular known as “betcha can’t eat just one.” Pepsi-Cola merged with the Frito company in 1965 to become what is now known as PepsiCo. The merger was thought of as a “marriage made in heaven” with customers able to enjoy delicious salted snacks along with a Pepsi-Cola drink. Truly heavenly isn’t it?

The brand manufactures various potato chips including the classic potato chips, BBQ flavored, Cheddar & sour cream, Dill pickle, Bay Crab spice, etc. Frito Lay also offers kettled cooked potato chips including Jalapeno, Onion, Smoky BBQ & salt, Vinegar, etc.

Lays is PepsiCo’s 2nd most popular brand with sales of around $9 billion in 2011. It is just behind the original Pepsi-Cola brand.

Gatorade

Gatorade is PepsiCo’s 4th best selling product that had total annual sales of $7 billion, just behind Mountain Dew, Lays and the original Pepsi-Cola. Gatorade manufactures sports drinks that are sold in over 80 countries worldwide. The formula for the drink was first developed in 1965 by Robert Cade, a Physician residing in Texas. Gatorade was purchased by Quaker Oats Company in 1983, until PepsiCo acquired Quaker Oats Company in the year 2000 for $13 billion.

Some of Gatorade’s best selling products include its 24 pack Thirst Quenchers with Zero Sugar and Fruit Punch, Lemon, Orange, Strawberry flavors, etc. Gatorade has celebrity endorsements from some of the sport’s world top sports legends including Serena Williams, Michael Jordan, Dwight Howard, Usain Bolt, Lionel Messi and Peyton Manning, etc.

Screenshot of Pepsico's Top Brands

Performance of PepsiCo Stock over the Long Term

Below is a monthly chart of Pepsico Stock from 1982 to 2019. The price has increased from $1.76 in 1982 to a present value of almost $137. That is an impressive 7,784% gain over 37 years. This results in an average annualized compounding gain of 12.5%.

Pepsico Stock Performance Long Term

Dividend History, Sustainability and Payout Ratio

PepsiCo Stock has paid dividends since 1972, marking a 47 year history of consistently raising dividends. PepsiCo belongs to the S&P 500 Dividend Aristocrats Index, an elite group of blue chip dividend paying stocks that have:

  • Raised dividends for at least 25 years
  • Are included in the S&P 500 Index
  • Have a market capitalization of at least $3 billion.

Attached is a chart showing PepsiCo’s upward trending dividend growth history since 1972.  The compounded annual growth rate (CAGR) is 13%.

Chart below shows percentage dividend growth year over year  since 1973. PepsiCo has an impressive record of growing  dividends consistently for 47 years. Even during the great financial crisis of 2008 to 2010, PepsiCo grew its dividend by 15.79%, 7.58% and 6.48% respectively.

Measuring the Dividend Payout Ratio

PepsiCo has paid dividends every quarter to investors for 47 years; this makes it a very reliable income generating blue chip stock. However, investors should keep track of its financials to ensure the company can continue making these dividend payments for the long term. One way to measure this is through the dividend payout ratio.

The dividend payout ratio measures how much of a company’s free cash flow is paid out in the form of dividends. Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment. Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In PepsiCo’s 2018 annual report, the company gives us a calculation of free cash flows. In 2018, the company generated $9.415 billion in cash flows from operations and spent a net of $3.148 billion in capital spending. This means PepsiCo generated $6.267 billion in free cash flow for 2018.

For fiscal 2018, PepsiCo paid out a total of $4.93 billion in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $4.93 billion / $6.267 billion

Dividend Payout Ratio = 79%

PepsiCo pays out 79% of its free cash flows to investors in the form of dividends. While this number is typically on the higher side, as the company grows its earnings through future capital spending, the growth and future payment of dividends is generally safe.

Stock Performance and Valuation

PepsiCo Stock is up 24.6% year to date (October 2019), versus the S&P 500 up 19.1%. We do not like PepsiCo stock at these levels because valuation is quite expensive. PepsiCo trades at a forward price to earnings ratio of 24.7 while the S&P 500 trades at just 16.9. The S&P 500 Consumer Staples ETF (XLP) trades at a forward price/earnings ratio of 19.6 times.

How are we making this calculation? For the full year 2019, PepsiCo is expected to generate earnings per share of $5.51. The stock currently has a price of $136.25 as of the time of this writing. Therefore:

Forward Price to Earnings Ratio = Stock Price / Forward 12 Months Earnings per Share

Forward P/E = $136.25 / $5.51

Forward P/E = 24.7 times earnings

The reason for PepsiCo Stock trading at a premium to the S&P 500 is due to recession fears in 2020. Since PepsiCo is a Consumer Staple company, investors favor it for stable cash flows, recession proof products, high dividend yield and strong balance sheet with a top credit rating.

PepsiCo Stock Long Term Performance

Attached is a 10 year chart comparing PepsiCo’s performance to that of the S&P 500 Index. Why the S&P 500? Because it is an index of America’s top blue chip stocks, many of them that pay dividends and grow them every year.

PepsiCo’s performance is in red while the S&P 500 is in blue. As of 21st October 2019, PepsiCo has yielded a return of 199.65% in the last 10 years while the S&P 500 is up 178.5%. This is an out performance of 21%.

By analyzing this chart, we can see PepsiCo has started outperforming the S&P 500 in 2019 due to several reasons including the summer 2019 yield curve inversion, trade war with China and the Federal Reserve’s emergency operations in the money markets.

Between 2012 to 2015, the S&P 500 handily outperformed PepsiCo’s stock due to a growing economy, lower unemployment rate, more job openings and higher GDP growth.

Executive Summary

Here is what we like and don’t like about Pepsico Stock.

Likes

  • Consistent dividend growth for 47 years.
  • Higher dividend yield of 2.8%.
  • Growing dividends at 8.4% annually (5 year growth rate).
  • Portfolio of 22 global brands each generating $1 billion in sales.
  • Huge competitive moat around its business.

Dislikes

  • Expensive valuation, at 24.7 times 2019 earnings.
  • Dividend payout ratio of 79% which is higher than the threshold of 50% that we like to see.
Market Capitalization $190.1 Billion
Dividend Yield 2.8%
Forward PE Ratio 24.7 times earnings
Dividend Growth (5 Year Avg.) 8.41%
Dividend Payout Ratio 79%
EPS Growth (5 Year Avg.) 15%
2018 Revenues $64.66 billion
Gross Margin 54.4%
Net Margin 12%

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