|Branch||Drinks / snacks|
|Market capitalization||€ 163.5 billion|
|Stability dividend||0.99 from max. 1.0|
|Stability gain||0.95 of max. 1.0|
The price of PepsiCo shares has increased 50 percent over the past 5 years and has thus risen faster than the share of the competitor Coca-Cola with a return of “only” 31 percent within the same period.
With a dividend increase of 48 years in a row, PepsiCo, like Coca-Cola, is one of the dividend aristocrats and also shines with steadily increasing profits and cash flows that even put Coca-Cola in the shade. Still, Coca-Cola stock is receiving more attention in the financial community, perhaps due to Warren Buffett’s Coca-Cola investment. In this stock analysis we put PepsiCo shares to the test and show you that the Coca-Cola competitor has a lot to offer.
The business model: This is how PepsiCo makes money
PepsiCo is an American producer of beverages and snacks based in New York. The company was created in 1965 through the merger of the Pepsi-Cola Company with Frito-Lay Inc., a producer of chips and snacks. The managing directors recognized the added value of a company that offers both snacks and drinks, because these are often consumed together. The symbiosis is still reflected today in the distribution of sales. Both product areas are responsible for around half of sales:
PepsiCo’s portfolio includes a variety of brands that are sold through wholesalers, retailers, and online. You are probably familiar with some of them, such as Pepsi, Sodastream, Mountain Dew or Doritos:
The company’s 23 brands achieve sales of over USD 1 billion:
One of the challenges for corporations in the food and beverage industry is to quickly adapt to changing consumer habits. In particular, the trend towards healthier nutrition forces you to change your own product portfolio in order not to fall behind the competition. So sugary sodas are becoming less important, while carbonated water and energy drinks are on the rise. PepsiCo has responded to this trend by establishing its own brands and making acquisitions. With the Bubly brand PepsiCo offers carbonated water. When that wasn’t enough, Sodastream was sold for $ 3.2 billion in 2018 accepted. In the field of energy drinks, PepsiCo went with the Mountain Dew brand at the start. Because that wasn’t enough to score against Monster Beverage and Redbull, Rockstar Energy was bought for just under 3.9 billion USD in March 2020.
Parallel to Pepsi, there is also a free stock analysis on the Stock Finder YouTube channel:
Competitors to PepsiCo
PepsiCo’s best-known competitor is Coca-Cola. Perhaps you know someone in your personal environment who swears by the cola from one of the two companies and vehemently refuses to drink the other brand’s drink. You wouldn’t be alone with that. Because despite the similarity of the two dark showers, there is a strong brand loyalty, which does not prevent the two opponents from claiming as large a part of the soft drinks market as possible in the competition for market share. In the food and snack business, PepsiCo also competes with the Kellogg Company, Nestle, Kraft-Heinz, Mondelez, Campbell Soup and Conagra Brands.
PepsiCo’s competitors (data source: Stock Finder)
With a P / E of 26 and a dividend yield of 3.1%, PepsiCo has metrics similar to arch-rival Coca-Cola. The numbers for the rest of the group look similar, with the exception of Campbell-Soup and Kraft-Heinz. The above-average stability of the earnings situation, which is common in this industry, is reflected in the high P / E ratios. Since investors are willing to pay for security, these companies’ profits are rewarded with higher P / E ratios, which means a higher share price.
That’s how profitable PepsiCo is
The food and beverage industry is not known for high growth rates. Typically these are established companies that are organically growing in the low to mid single digits. Organic growth is generated through a combination of higher prices and volume growth, which can be boosted by new products and entry into new markets. However, gaining market share is usually arduous, and because most companies have a large number of products in their portfolios, even gaining market share of a product has only a modest impact on the company’s success. The most promising is the quick reaction to new trends, which often requires high investments in the form of new brands or expensive acquisitions.
The moderate growth also applies to PepsiCo. PepsiCo was able to post a profit growth of 7 percent annually over a 5-year perspective. Over a 10-year perspective, however, it was only 2.7 percent annually. The operating cash flow looks similar, with an annual increase of 7.5 percent over the past 5 years, but only 1.7 percent over the past 10 years. The dividend rose about 8 percent annually in both periods. So you shouldn’t expect double-digit growth rates from PepsiCo in the long term.
The situation is similar with sales growth. Big leaps in sales mostly result from acquisitions. For the past 10 years, PepsiCo’s revenue has grown at just 1.8 percent annually. Profitability has hardly changed in this period either. It has been consistently close to the 16 percent mark every year since 2011. For some investors, the leisurely growth may be a disadvantage, as it avoids positive turns with high price gains in a short time. Other investors, on the other hand, appreciate the planning security and the fact that PepsiCo’s business model ensures a certain predictability even in troubled times like these.
Is PepsiCo Stock Dividend Safe?
PepsiCo pays its dividend quarterly. After the most recent increase of 7 US cents to $ 1.02, PepsiCo is now paying $ 4.08 a year. At the current price, this corresponds to a dividend yield of just under 3 percent. Pepsi has also been raising dividends for 48 consecutive years, making the company one of the Dividend Aristocrats heard.
Will the current PepsiCo dividend be rather high or low over time? In the dividend turbo Using the Stock Finder, you can see that PepsiCo’s dividend yield has been surprisingly consistent over the past 10 years. The return is currently only marginally above the annual average of 2.85 percent. From a dividend perspective, the PepsiCo share currently appears to be fairly valued.
Almost 3 percent dividend is not a bad thing. All the more when you consider that the dividend rose by an average of 8 percent annually over a ten-year period. At this speed, the 3 percent dividend yield can quickly become 4 or 5 percent in the medium term. However, for dividend growth to be secured, profits and cash flows must also grow. A moderate level of debt and a low payout ratio also provide a dividend buffer even in bad times. Are these requirements for PepsiCo shares met?
The criterion of steadily rising profits and cash flows seems to be met after just a quick look at the stock finder. Both PepsiCo’s profit and cash flow have grown steadily over the past few years without any significant setbacks. This is not particularly surprising for this industry. Even a global catastrophe like the Covid-19 pandemic could not harm PepsiCo’s business. The dividend seems immune to a sudden drop in earnings. However, the distribution ratios on both profit and free cash flow have also risen in recent years and are currently just under 80 and 86 percent. Still, I don’t see any cause for concern here. Not only do I think a slump in earnings is unlikely, but analysts estimate that corporate earnings will even pick up in the coming years.
In terms of debt, on the other hand, things don’t look so good for PepsiCo at first glance. Total debt is over $ 78 billion. However, if you have a look at the latest quarterly report (Page 7), it is noticeable that only about half of this debt is interest-bearing. In the past year 2019, the interest rate was 11 percent (page 73) of operating profit, which is perfectly acceptable and does not endanger the dividend.
In my estimation, the PepsiCo dividend is safe. But what is the potential for future dividend hikes? This requires that profit and cash flow increase in the long term. According to the analysts’ estimates in the stock finder, this is the case. Both profit and cash flow are expected to increase in the coming years. Personally, however, I would only expect dividend growth in the low to mid single-digit percentage range in the very long term. I base my assumption with the fact that the food and beverage market is not showing any high growth rates, which is reflected in the figures for the past 10 years.
In the long term, dividend increases must come from profit and cash flow growth. The free cash flow, from which the dividends can be financed directly, is of particular interest here. The repayment power in turn shows how much of the free cash flow minus the dividends is left to repay any debts. Things have become increasingly tight for PepsiCo in recent years:
The low free cash flow and consequently the low repayment power are primarily due to the takeovers described above. This will also be evident from the 2019 annual report. The columns show the years 2017 to 2019 from right to left. Pepsi had significantly more spending through takeovers in 2018 and 2019 than in 2017. The low free cash flow is therefore the management’s reaction to changing consumer habits, which, in addition to establishing new brands, require expensive takeovers. The management tries to prevent the loss of market share and at the same time to generate new growth. After investing billions in carbonated water and energy drinks, the big acquisitions should be a thing of the past for now. In this case, the free cash flow and thus also the repayment power will increase again in the coming years.
To summarize the arguments in this chapter again: In my opinion, the PepsiCo dividend is safe and will continue to increase in the future. In the short to medium term, higher growth rates should be possible, but in the long term you should expect growth in the amount of long-term profit growth.
Non-cyclical dividend stocks are growing in popularity. The stormier the times, the more tempting the supposedly safe haven. One of these ports is called Coca-Cola. But there are other attractive dividend payers that we have already analyzed in detail in the share finder blog. In addition, in Germany’s most popular share finder you will find over 1,000 other dividend shares that you can fill your portfolio with.
PepsiCo vs. Coke
The main difference between PepsiCo and Coca-Cola is that Coca-Cola is a beverage-only company, while Pepsi is around half of its sales achieved with snacks and other foods. However, both companies have a lot in common from a shareholder perspective. Both companies are dividend aristocrats and therefore very interesting for dividend investors. When it comes to profitability, Coca-Cola has the edge, because at 27 percent, the operating margin is well above that of PepsiCo, which is only 15 percent. In terms of growth, however, PepsiCo is the winner. Personally, I think that both stocks fit very well in a dividend portfolio and would mainly make a decision based on the valuation of the stocks.
More dividend payers
If you are interested in dividend stocks in the non-cyclical consumer sector, the following investments could also be of interest to you. A click on the respective link takes you directly to the free stock analysis.
Is PepsiCo stock cheap?
Due to its profitability, the PepsiCo share is very well suited for a valuation based on historical valuation indicators. I choose a 5-year observation period because the P / E ratio has been higher in recent years than it was 10 years ago. If one were to choose a longer period, the fair value would be pulled down by the lower P / E ratio of previous years. As I currently see no signs as to why the market should rate PepsiCo’s earnings at a significantly lower P / E ratio in the near future, the past 5 years is the optimal valuation period in my opinion.
For this period, the fair value dividend is almost identical to the current price, while the other fair values are lower. In general, the dividend yield would be a suitable valuation figure here. However, this fair value has been pushed up in recent years by the increase in the payout ratio. Since these increases cannot go on like this in the long term, I would rather focus on the other fair values here. These are close to each other, but also a good deal below the current share price. The price of the share is $ 138, as is the fair value dividend. The fair values for profit and cash flow are significantly lower at $ 123 and $ 126. The PepsiCo share is currently a bit overvalued.
In my opinion, the competitor Coca-Cola is valued more attractively. Here, the fair value dividend is more meaningful than at PepsiCo, as the payout ratio has not increased significantly this year. The fair value of the profit for the Coca-Cola share is also well above the current price. Admittedly, the fair value of cash flow signals an overvaluation. However, this is an anomaly this year, as you can see from the further course of the curve.
Conclusion: The PepsiCo share – quality has its price
Like all other quality blue chip stocks, PepsiCo shares are rarely available cheaply. Since profits in this sector are very stable, there are seldom nasty surprises and the associated high price losses. In times of general uncertainty on the stock exchanges, such stocks are often quite expensive, as investors flee to these stocks in search of security. Despite the high quality of the company, the PepsiCo share currently appears to me to be overvalued. Dividend investors could add PepsiCo stock to their wish-lists and wait for one of the rare opportunities to buy it at a cheaper price. Should there be another stock market crash due to the second corona wave, this would be such an opportunity. For relaxed shareholders, there is also a step-by-step entry with a share savings plan at.
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