The Only Reason Investors Need to Own Pepsi Stock
Why Pepsi Stock Is a Must-Own for Income Investors
Forty-four. That’s how many years PepsiCo, Inc. (NYSE:PEP) stock has been raising its dividends.
While the stock market is always forward-looking, income investors should not ignore a company’s dividend history, especially one as good as what Pepsi stock has.
This is because dividends are sticky. There is no guarantee that companies will be able to keep paying what they are paying, and there are plenty of companies that have cut their dividends or stopped paying altogether. However, when a company does raise its dividend rate, the implication is that it will keep paying at least this much going into the future.
Where does that implication come from?
Well, a dividend increase says many things, one of which is the company’s financial strength. If management is not sure whether the company will be able to keep its dividend rate going forward, it could choose other ways to return value to shareholders, such as issuing a one-time special dividend or buying back its shares. If PepsiCo chooses to raise its regular dividend rate, chances are the company knows that it can afford to keep paying at least this much, well into the future.
Then there’s the stock market reaction. While dividend hikes are always welcomed by income investors, a dividend cut could anger all investors. Even the possibility of unstable dividends could send a company’s shares tumbling. To prevent their stock prices from plunging due to potential dividend cuts in the future, companies are extremely careful when it comes to raising their payouts.
Therefore, if a company did raise its dividends consistently, it is likely going to be something special. Indeed, I believe that Pepsi stock is a must-own for dividend investors.
PepsiCo has more than a century of operating history, but the ingredients that made it successful 100 years ago still work today.
You see, many companies have to show how they can survive the next economic downturn. For PepsiCo, that’s not really a concern, because the company is deeply entrenched in the global food and beverage business. The demand for its products are relatively inelastic to how the overall economy is doing. That’s why, despite the ups and downs in the economy over the past four decades, PEP stock never stopped raising its payout to dividend investors.
PepsiCo is also well diversified geographically. Its products are distributed across more than 200 countries around the world. It is unlikely that a downturn in one region is going to impact PEP stock’s performance too much.
Last, but certainly not least, Pepsi stock is not that expensive. Income investors should always have recession-proof stocks in their portfolio but, no matter how good a stock is, it’s not worth an infinitely high price.
PEP stock currently trades at $106.15 apiece, giving it a price-to-earnings (P/E) multiple of 23.14 times, which is significantly lower than the industry’s average P/E of 39.45 times. If you use the company’s expected earnings for 2017, you’d see that Pepsi stock has a forward P/E of just over 20 times.
Another Dividend Hike Coming Soon for Pepsi Stock?
PepsiCo is due to report fourth-quarter earnings later this month. Wall Street analysts expect the food and beverage giant to report $1.16 of earnings per share, which would represent a nine-percent increase from the $1.06 per share earned in the year-ago period. Revenue is expected to grow 5.2% year-over-year to $19.55 billion. (Source: “Pepsico, Inc. (PEP),” Yahoo! Finance, last accessed February 8, 2017.)
What I’m more interested in is how much Pepsi stock is going to raise its dividend. While the company has been raising its dividend every year for over four decades, its most recent dividend history is probably the most relevant to what’s going to happen next. Over the past five years, Pepsi stock’s quarterly dividend payout has grown at a compound annual growth rate of 7.89%. In the most recent quarter, the company had a payout ratio of less than 55%. (Source: “PepsiCo Reports Third Quarter 2016 Results,” PepsiCo, Inc., September 29, 2016.)
I wouldn’t be surprised if the company announces a mid- to high-single-digit increase to its quarterly dividend rate soon. This would extend Pepsi stock’s streak of dividend hikes to 45 consecutive years, making it closer to become a “dividend king.”