Some of the world’s best investors stick to dividend portfolios. They know that a steady stream of income is a top wealth building strategy. And finding the best deals is vital. So today, we’re going to review another one of the best dividend stocks around. Let’s take a look at Pepsi’s dividend history and safety…
Business Overview and Highlights
Pepsi (Nasdaq: PEP) is a $178 billion business based out of New York. The food, beverage, and snack company owns 22 brands including Frito-Lay, Gatorade, Pepsi-Cola, Quaker, Lipton, and Tropicana. Pepsi employs 267,000 people. Last year Pepsi pulled in $65 billion in sales and that breaks down to $242,000 per employee.
The company runs within the consumer sector and maintains a solid credit rating (A+) from the S&P. This allows Pepsi to issue cheap debt to grow the business and pay dividends.
On February 13 the board of directors declared a quarterly dividend of $0.93 per share. The dividend was made payable on March 29 to shareholders of record at the close of business on March 1. Pepsi has paid consecutive quarterly cash dividends since 1965 making it a Dividend Aristocrat. If Pepsi continues to increase their dividend, the company will become a dividend king in 2023.
While consumers have steered away from soda, Pepsi has found ways to remain relevant in the current health conscious trend. Not only are they diversified through their food and snack subsidiaries, Pepsi has also diversified through bottled water, teas, and sports drinks. This diversification is a great sign for Pepsi’s dividend and long-term financial future.
Pepsi’s 10-Year Dividend History
The company paid investors $1.78 per share a decade ago. Over the last 10 years, the dividend has climbed to $3.59. That’s a 102% increase and you can see the annual changes below…
The compound annual growth is 7.3% over 10 years… but over the last year, the dividend climbed 13.3%. The increase in dividend growth is a good sign. Pepsi might work out as a great income investment. Let’s take a look at the yield…
Pepsi’s Current Yield vs. 10-Year Average
Pepsi’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and we’ll look at that soon.
The dividend yield comes in at 2.92% and that’s below the 10-year average of 3.45%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that for every $1 Pepsi earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety, but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Pepsi payout ratio based on free cash flow over the last 10 years…
The ratio is fairly steady over the last 10 years and the trend is up. The upward trend is not a great sign for dividend investors. The last reported year shows a payout ratio of 82.8%. This doesn’t give much wiggle room for Pepsi’s board of directors to raise the dividend. Given Pepsi’s longstanding dividend record, the pressure is on to find a way to continue their dividend growth streak.
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