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 an inventory of all 65 Dividend Aristocrats, together with essential monetary metrics resembling dividend yields and price-to-earnings ratios.
You may obtain your free record of all 65 Dividend Aristocrats by clicking on the hyperlink beneath:
We evaluate all of the Dividend Aristocrats annually. Subsequent up, we’ll evaluate meals and beverage behemoth PepsiCo (PEP).
The inventory affords a stable 2.9% dividend yield, and has elevated its dividend for 49 years in a row. The corporate’s dividend may be very secure and the inventory is appropriate for risk-averse revenue buyers.
PepsiCo’s valuation is just not a screaming cut price proper now, however it’s hardly ever an inexpensive inventory, as a result of its sturdy enterprise mannequin and regular progress. The corporate ought to have little bother persevering with to lift its dividend for a few years.
Pepsi-Cola was created within the late Nineties by Caleb Bradham, a North Carolina pharmacist. In the meantime, Frito-Lay, Inc. was shaped in 1961 from the merger of Frito Firm, and the H. W. Lay Firm. In its present type, PepsiCo got here collectively because of the 1965 merger of Pepsi-Cola and Frito-Lay.
At this time, PepsiCo is a worldwide meals and beverage big. 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 well-liked manufacturers. Among 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 below 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 effectively. 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% improve 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 had 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 had been decrease by 1%. Lastly, Quaker Meals North America income was up 1% with a 4% lower in volumes following a really sturdy 2020.
PepsiCo has an extended historical past of regular progress. Even in a difficult setting for soda, PepsiCo has continued its constant progress. An illustration of the corporate’s efficiency from 2013 will be seen within the beneath picture.
Supply: Investor Presentation
We imagine PepsiCo will generate round 5%-6% adjusted earnings-per-share progress per yr over the following 5 years. Going ahead, two of PepsiCo’s most promising catalysts are progress 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.
Because of this, 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 can be resonating extra strongly with altering client preferences.
As well as, PepsiCo has an enormous progress 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 progress charges.
Rising markets had been a progress driver as soon as once more final quarter. Income for the Africa/Center East/South Asia was down 1% primarily as a result of divestitures, however meals and snack volumes had been increased 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 increased by a double–digit share.
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 acquire 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 energy 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 annually in analysis and improvement, to innovate new merchandise and packaging designs. As well as, PepsiCo often spends greater than $2 billion annually on promoting, to take care of market share and construct model fairness with shoppers.
PepsiCo’s aggressive benefits and robust manufacturers permit the corporate to be extremely worthwhile, even throughout recessions. Meals and drinks at all times retain a sure stage of demand, which is why the corporate held up so effectively in the course of the Nice Recession.
PepsiCo’s earnings-per-share all through the Nice Recession of 2007-2009 are listed beneath:
- 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% improve)
- 2010 earnings-per-share of $3.91 (3.7% improve)
As you may see, PepsiCo’s earnings-per-share declined solely modestly in 2008. The corporate proceeded to develop earnings by almost 20% in 2009, which may be very spectacular. Earnings continued to develop as soon as the recession ended.
The corporate reported one other sturdy yr of progress in 2020, when the coronavirus pandemic despatched the U.S. financial system right into a recession. Due to this fact, PepsiCo is a recession-resistant enterprise.
Valuation & Anticipated Returns
PepsiCo is predicted to generate earnings-per-share of $5.82 for 2021. Primarily based on this, the inventory trades for a price-to-earnings ratio of 24.5. Our honest worth estimate is a price-to-earnings ratio of 20. Primarily based on this, the inventory seems overvalued. A declining price-to-earnings ratio might cut back annual returns by 4.0% annually over the following 5 years.
Because of this, future returns will probably be comprised of earnings-per-share progress, and dividends. We count on PepsiCo to develop earnings-per-share annually by 5.5%, consisting of natural income progress, acquisitions, modest margin enlargement, and share repurchases.
As well as, PepsiCo additionally has a 2.9% present dividend yield. Nonetheless, the overvaluation can be tough for the inventory to beat. The mix of valuation adjustments, earnings progress, and dividends leads to whole anticipated returns of 4.4% per yr over the following 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 charge in-line with the expansion charge of its adjusted EPS.
Shares do commerce with a premium valuation, however that’s probably as a result of firm’s sturdy progress. Few different firms within the client staples sector can match its progress. Even fewer firms can match PepsiCo’s historical past of dividend progress. PepsiCo is only one yr away from attaining Dividend King standing. As such, we proceed to charge shares as a maintain.
PepsiCo is a really sturdy enterprise, with various category-leading manufacturers. By investing closely in new merchandise and acquisitions, it’s prone to proceed rising gross sales and earnings for a few years.
Shareholders ought to proceed to learn from PepsiCo’s sturdy enterprise via annual dividend will increase. The inventory is overvalued, which implies worth buyers ought to anticipate a extra engaging entry level earlier than shopping for shares.
That mentioned, PepsiCo stays a beneficial holding for a dividend progress portfolio.
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