PepsiCo, Inc.: One Dividend Stock for the Next 100 Years
PEP Stock Returning Value to Investors
Right now, PepsiCo, Inc. (NASDAQ:PEP) stock is far from being a hot commodity. But it offers something that very few companies can provide in this day and age: peace of mind for investors. Let me explain.
In the current stock market, trading is all the rage. With increased volatility over the last several months, investors who bought and sold at the right time have made some decent profits.
The difficult part, of course, is knowing when that right time is. Besides, unless you are a professional trader, who has the time to monitor their positions every minute of the trading day?
In other words, trading can be very profitable, but it also takes a lot of time and effort. Is there an easier way for investors to make money in the stock market? Of course there is: “buy and hold.”
This strategy is nothing new; long-term income investors have been using it for decades. And with the right company, the strategy can deliver astronomical returns over time.
Take PepsiCo, Inc., for instance. The company does not come from an exciting industry; it operates in the food and beverage business. But that has not stopped PEP stock investors from earning huge returns over the years. Just take a look at the chart below and you’ll see what I mean.
PepsiCo, Inc. Stock Chart
Chart courtesy of StockCharts.com
Imagine buying PepsiCo stock 30 years ago. If you had just held on to your shares over that time period, you would be looking at a total return of over 3,200%. And yes, that number’s correct.
And it gets even better.
Other than providing huge capital gains, the company has delivered an increasing stream of dividends. In fact, PepsiCo has raised its annual payout in each of the last 45 years, which makes the company a “Dividend Aristocrat,” a company with at least 25 consecutive years of annual dividend increases. (Source: “Shareholder Information,” PepsiCo, Inc., last accessed April 27, 2018.)
The beauty of the buy and hold strategy is that it does not involve making decisions on when to buy and sell. Investors can simply hold on to their shares, collect the dividend checks, and see the value of their holdings increase over time.
It also makes life much easier during market downturns. As we have seen plenty of times in history, stocks don’t always go up. During stock market crashes, even the most solid blue-chip companies can take double-digit losses.
However, because of PepsiCo’s increasing dividend stream, it has given investors a very good reason not to sell their shares.
As the market recovered from downturns, investors who held on to their shares of PEP stock were handsomely rewarded. For instance, since reaching a low in 2009 due to the stock market crash, PepsiCo shares have more than doubled in value. In other words, PEP stock provided buy and hold investors with peace of mind.
Of course, past performance does not guarantee future results.
Why would today’s income investors consider a century-old company? Well, because, while PepsiCo has been in the same business for decades, the company still has the potential to pay out even bigger dividends down the road.
PepsiCo, Inc.: Rising Dividends Backed by a Growing Business
Consider this: in 2017, PepsiCo generated $63.5 billion in revenue, representing a 1.2% increase year-over-year. Core earnings came in at $5.23 per share, up nine percent from 2016 on a constant currency basis. (Source: “PepsiCo Reports Fourth Quarter and Full-Year 2017 Results; Provides 2018 Financial Outlook,” PepsiCo, Inc., February 13, 2018.)
PepsiCo declared $3.1675 of dividends in 2017. Therefore, it had a payout ratio of just over 60%. A conservative payout ratio like this not only leaves a wide margin of safety, but also gives management plenty of room for future dividend increases.
PepsiCo’s growth momentum has continued in 2018. In the first quarter of this year, the company generated almost $12.6 billion of revenue, up four percent year-over-year. Core earnings came in at $0.96 per share, which was more than enough to cover its $0.805 of dividends per share declared during this period. (Source: “PepsiCo Reports First Quarter 2018 Results; Reaffirms 2018 Financial Targets,” PepsiCo, Inc., April 26, 2018.)
Thanks to a growing business, PepsiCo decided to raise its annualized dividend by 15% to $3.71 per share earlier this year. The new quarterly dividend rate of $0.9275 per share will start with the company’s June payment.
Trading at $101.71 apiece, PEP stock offers a forward annual yield of 3.65%.
While you can find plenty of higher-yielding stocks in today’s market, keep in mind that, with consistent dividend growth, investors of PepsiCo will likely collect much higher yield-on-cost than what the current numbers suggest.