Is Pepsi A Good Dividend Stock?
It’s time for a Pepsi dividend review and stock analysis.
Putting my personal drink preferences aside, PepsiCo (NASDAQ: PEP) is a favored stock in the dividend investor community. Most noteworthy, there is always a lot of interest in buying Pepsi stock by this group of investors.
So, let’s work through a Pepsi dividend stock analysis.
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Pepsi Dividend Stock Analysis
Are you ready to buy some stock? Then, we must answer some important questions about PepsiCo?
Is Pepsi a good dividend stock? Is Pepsico stock a good investment?
Which is a better stock, Pepsi, or Coke? Is Pepsi stock currently a good buy?
To help manage your finances and investments, I will answer these questions and more. So, let’s dive into the Pepsi dividend stock review right now!
Pepsi – Company Background
PepsiCo is one of the world’s leading beverage and snack food companies. It was established through the merger of Pepsi-Cola and Frito-Lay.
Pepsi-Cola was created in the late 1890s. Frito-Lay, Inc. was formed by the 1961 merger of the Frito Company with H. W. Lay Company.
Source: Pepsico – About.
PepsiCo has a diverse global portfolio of brands. They reside in the savory snacks and beverages categories.
Some of their well-known brands include:
- Pepsi Cola
- Gatorade sports drink
- Tropicana juices
- Aquafina water
- Lay’s chips
- Doritos chips
- Fritos chips
Source: Pepsico Product Information
Pepsico Business Strategy
I thumbed through a recent presentation made by Pepsi. It was for the Consumer Analysts Group of New York Conference. Looking through it, I tried to get a sense of their business priorities.
Here is what I found:
Grow Product Revenue & Market Penetration To:
- Leverage their #1 global position in savory snacks
- Expand their #2 position in global beverages
- Fortify growth in developed markets
- Accelerate growth by investing in foreign markets
Accelerate Investments In:
- Manufacturing capacity
- Digitalization & technology
- Delivery route optimization
- Supply chain agility
- Sustainability, talent, and culture
- Advertising & Marketing
Manage Cost To Achieve:
- Work redesign for simplification & waste reduction
- Increasing returns on investments
- Increasing asset utilization
Financial Improvement Goals:
- 4%+ Organic Revenue Growth
- Expansion of operating margins
- 7%+ Constant currency earnings per share growth
- Increasing returns on invested capital
With a brief review of Pepsi’s business taken care of, let’s move on to the Pepsi dividend.
Does Pepsi Pay A Dividend?
Yes. Pepsi pays a dividend. And has paid a dividend for many years.
So, let’s dig into all of the facts and figures about Pepsi’s dividend next. It’s the only way I can answer the all-important question. Is Pepsi a good dividend stock investment?
How Much Is The Pepsi Dividend Per Share?
Pepsi currently pays an annualized forward dividend of $4.09 per share.
Pepsi Dividend Yield
The dividend per share gives us a 3% Pepsi dividend yield at the recent Pepsi stock price. For comparison, Coke’s recent dividend yield was lower at 3.4%.
I start my search and selection process for dividend stocks looking for dividend yields that fall in the 3-5% range. I make exceptions to this rule. But, won’t have to with Pepsi.
Let’s continue the Pepsi dividend review.
How Often Does Pepsi Pay Dividends?
Pepsi pays dividends every 3 months or 4 times per year. Each quarterly dividend payment is $1.0225 per share.
In Which Months Does Pepsi Pay Its Dividend?
A company’s dividend payment pattern is important to many investors. Why? Because some people build a dividend portfolio with the goal of getting paid dividends every month.
With that in mind, Pepsi’s dividends are paid during January, March, June, and September.
In January the dividend is paid during the first week of the month. In contrast, during March, June, and December, it is paid during the last week of the month.
Pepsi’s Ex-Dividend Date
As an investor in Pepsi, you must complete your purchase by the ex-dividend date. In order to receive the next stock dividend payout.
Pepsi’s ex-dividend date falls about 4 weeks prior to when its quarterly dividend is paid.
Pepsi’s ex-dividend date is slightly different each quarter. So, it’s best to check Pepsi’s ex-dividend date and payment information each quarter if the timing of dividend payments is important to you.
Pepsi Dividend History
According to a recent news release, PepsiCo has paid consecutive quarterly cash dividends since 1965.
Starting in 1973, the company has increased its annual dividend every year. This makes for 48 consecutive annual dividend increases.
Will Pepsi Become a Dividend King?
Assuming Pepsi is able to increase its dividend each of the next 2 years, the company will become a newly crowned Dividend King. In contrast, Coke has already joined the current group of Dividend Kings with nearly 60 years of dividend increases under its belt.
Dividend Kings are those incredible and rare companies who have increased their dividends for at least 50 consecutive years!
Are you looking to invest money in these types of companies? You already know that Coca-Cola is Dividend King.
And I have reviewed several others right here at Dividends Diversify. They reside in my model dividend income portfolio.
Here is a table with links to a few of these Dividend Kings for easy reference.
Table 1: Other Dividend Kings Pepsi Soon Will Join
|Genuine Parts Company (GPC)|
|Hormel Foods (HRL)|
|Procter & Gamble (PG)|
Hopefully that’s plenty of investment ideas to keep you busy.
Pepsi Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
For me, this is an excellent and consistent dividend track record of recent growth from Pepsi. It is much better than Coke’s recent dividend growth trend.
Furthermore, for 2020, the Pepsi dividend was increased by their Board of Directors another 7%.
Pepsi Dividend Policy
Every company has a dividend policy. Some choose to communicate that policy to the public. Other companies do not.
A formal dividend policy communication is very helpful in setting future expectations for a company’s dividend. I appreciate it when management communicates this type of information.
In Pepsi’s case, I am not aware of formal communications from management about dividend policy. I do not consider this a “red flag”. It’s just an indication of how Pepsi chooses to go about its business.
I can tell from Pepsi’s dividend history that increasing quarterly cash dividends paid to shareholders will be a big part of the future.
Pepsi Revenue Trend & It’s Influence On Future Dividend Increases
Like many of the large, mature packaged food and beverage companies, revenue growth has been a challenge.
Changing consumer preferences have been an issue for companies like Pepsi. Why?
First of all, carbonated beverages have fallen out of favor. Furthermore, people also want fresher, healthier food. Finally, life is fast-paced and many folks just want to snack multiple times a day on the run.
The Pepsi snack business has been performing better than its beverage unit. Unfortunately for PepsiCo, most of their snacks do not fall into the fresh and healthy category.
And of course, the events of 2020 will have an impact. Some positive and some negative.
Looking at the chart above, revenue has been stagnant for the last 7 years. In contrast, management is targeting 4%+ annual organic revenue growth going forward. And acquisitions can further add to that number.
But I will be watching to see how they do. After all, costs can only be cut so far.
Earnings and Pepsi dividend growth will ultimately require higher revenues. And unlike other essential service businesses for dividends, consumers have a lot of choices when it comes to what they eat and drink.
So let’s look at Pepsi’s dividend in relation to earnings next.
Pepsi Dividend Payout Ratio Based On Earnings
Pepsi’s accounting earnings are difficult to interpret. Since they are full of unusual charges.
To make sense out of them, I have excluded a number of 1-time items. Specifically,
- 2015: noncash write-offs for failed investments in Venezuela
- 2017: tax adjustments due to the new corporate tax law
- 2018: cost impact from Pepsi’s international reorganization.
With these 1 time events removed, core business earnings have been on a positive upward trend. This is mainly due to margin expansion from pricing and cost reductions.
Since 2015, the company has cut more than $1 billion a year from costs. This has come from closing manufacturing facilities, investing in automation, and reducing jobs. Efficiency efforts are continuing as their business strategy indicates.
But, dividends are paid from cash, not accounting earnings. So, let’s cross-check Pepsi’s dividend payout ratio against cash flow.
Pepsi Dividend Payout Ratio Based On Cash Flow
During 2019, Pepsi paid out almost all of its available cash flow to shareholders in the form of dividends.
For the last 3 years in total, 80% of cash flow was paid out in dividends. Let’s talk about Pepsi’s dividend payout ratios in more detail next.
Thoughts About The Pepsi Dividend Payout Ratios
Dividend payments have been growing more rapidly than earnings and cash flow.
For 2019, this has led to an earnings-based dividend payout ratio of 72%. And a cash-based payout ratio of just under 100%.
A lower dividend payout ratio is a positive metric. It shows the company has ample room to raise the dividend in the coming years. Or, withstand an earnings drop without having to reduce it.
Pepsi’s dividend looks adequately covered by earnings and cash for the time being. And because of the stability of Pepsi’s business, they are of little concern to me. But the dividend payout ratios are starting to get on the high side.
I do not want to see Pepsi go the way of Coke where dividend payout ratios exceed 90%. And virtually guarantee low dividend growth for the foreseeable future.
All of the discussion thus far about Pepsi’s dividend leads me to my dividend growth forecast.
Pepsi Dividend Growth Forecast
Because of the high dividend payout ratios, I believe dividend growth will be constrained.
It will be limited to a mid-to-high single-digit percentage range in the coming years. In line with earnings growth. Or, slightly lower than earnings growth to reduce the dividend payout ratos.
So, for my planning purposes, I’m going to assume the Pepsi dividend will grow 6-7% annually in the coming years.
Pepsi Balance Sheet & Credit Rating
Pepsi carries a large amount of debt. Their debt to equity ratio checks in at a relatively high 3.6 to 1. As a comparison, Coke’s debt to equity ratio is 2.7 to 1.
Similar to Coke, Pepsi has an A1 AND A+ credit rating from Moody’s and S&P, respectively.
Table 2: Credit Evaulation
As shown in the table above, these ratings represent “investment grade – low credit risk”.
Pepsi’s debt levels are slightly troublesome to me. Offsetting my concerns about debt is a high credit evaluation. Plus the consistency of the free cash flow generation from Pepsi’s business.
I do believe the higher dividend payout ratios combined with the debt levels will keep a lid on future dividend growth. So, I stand by my 6-7% Pepsi dividend growth forecast.
Pepsi Dividend Safety
I make a judgment about dividend safety looking at many of the factors we have discussed so far. Specifically,
- Business fundamentals
- Earnings and cash flow trends
- Dividend history
- Dividend payout ratios
- Debt levels and credit ratings
Based on these factors, I judge Pepsi’s dividend to be safe from a reduction in the foreseeable future.
Its time to wrap this Pepsi dividend stock analysis up by taking a look at the stock valuation.
Pepsi Stock Valuation
Let’s judge Pepsi’s stock value in several ways:
- Dividend discount model
- Morningstar fair value estimate
- Price to earnings ratio
- Dividend yield
Pepsi Dividend Discount Model
The single-stage dividend discount model (also known as the Gordon Growth Model) considers several factors I have discussed thus far.
- Current annual dividend payment – $4.09 per share
- Projected dividend growth – 7%
- My desired annual return on investment – 10%
Using these assumptions, the Gordon Growth Model calculator tells us the fair value of Pepsi stock is $146 per share.
Pepsi Stock Price to Earnings Ratio
The Pepsi stock price to 2019 earnings sits at about 26 times. To compare, Coke’s ratio is 22 times.
Pepsi stock is trading at a premium PE ratio. This is not an unusual situation for a high-quality dividend growth stock.
Morningstar Fair Value Estimate For Pepsi Stock
The investment analysis firm Morningstar believes Pepsi stock is fairly valued at $140 per share.
Pepsi Dividend Yield As An Indicator Of Value
Finally, I like dividend yields in the 3-5% range. I personally wouldn’t buy Pepsi stock unless the yield was at least 3%.
Especially given my concerns about future dividend growth. A 3% target dividend yield would give us a price of $136 per share.
Pepsi Stock Valuation Summary
We have looked at a number of valuation methods that suggest a range of values for Pepsi stock.
Here is a summary:
- Dividend discount model – $146 per share
- Price to 2019 earnings ratio at 26 times
- Morningstar fair value estimate – $140 per share
- 3% dividend yield target – $136 per share
As I review the various measures of value, I conclude that Pepsi stock is fully valued at this time. Neither a clear cut buy or sell, in my opinion.
Looking at it from my personal long-term dividend investor perspective. That is, buy and hold forever. I think Pepsi stock is a reasonable value at current prices or lower.
And, absent a change in business fundamentals, Pepsi would be a good stock buy if and when the overall stock market corrects. Bringing stocks like Pepsi down with it.
Pepsi Dividend Review & Stock Analysis Wrap Up
Let’s wrap up by answering a few of the questions I posed at the beginning.
Is Pepsi A Good Dividend Stock?
In my opinion, yes. Pepsi is a good dividend stock.
First of all, Pepsi has a rich history of rewarding shareholders with dividends. Furthermore, Pepsi stock has an attractive dividend yield and solid dividend growth potential.
Finally, Pepsi’s dividend is supported by a stable business loaded with iconic brands. This is a powerful combination any dividend investor can like.
Is Pepsi Stock A Good Investment?
Good investments depend on one’s investment objectives. If your investment objectives emphasize:
- Current income from dividends
- Increasing dividend income from annual dividend increases
- Long-term share price appreciation
Then yes, Pepsi stock is a good investment.
Is Pepsi Stock A Buy Now?
Pepsi shares appear to be fully valued. They are neither a clear cut buy or sell based on valuation.
I happen to like Pepsi stock at or below $135 per share as a long-term holding in my dividend stock portfolio.
Which Is A Better Stock, Pepsi or Coke?
This may not be a fair comparison. After all, nearly 60% of Pepsi’s business is in the snack food segment. While Coke is a pure-play in the nonalcoholic beverage sector.
Never the less, the 2 companies often get lumped together and compared. Because of their long history battling it out in the cola market.
The table below compares Coke and Pepsi stock head to head based on the factors I consider important as a dividend growth stock investor.
Table 3: Pepsi Stock Vs. Coke Stock
|Best Product Diversity||Pepsi|
|Highest Dividend Yield||Coke|
|Dividend King Status||Coke|
|Highest Dividend Growth||Pepsi|
|Communicates Dividend Policy||Coke|
|Lower Dividend Payout Ratios||Pepsi|
|Best Dividend Stock Safety||Tie|
|Attractive Stock Valuation||Tie|
It’s a close contest. I currently own both in my diversified collection of dividend stocks. And expect to hold both for the long-term. So, I have little bias in my opinion.
If forced to make a choice between the 2 stocks today, I select Pepsi for my dividend income and investment dollars.
Now, I must tell you. My choice for a refreshing cola on a hot summer day? I prefer an ice-cold Diet Coke!
But for a snack, I’ll take some Doritos with a hamburger off the grill
More Reading About Dividends And Dividend Stocks
- A valuable resource for dividend investors
- Rapid dividend appreciation from a Vanguard ETF
- Book review: The Little Book Of Big Dividends
My Favorite Dividend Investing & Finance Resources
- Free online stock trading with Webull
- Dividend stock recommendations from Simply Investing
- Excellent investment research from Morningstar
- Manage your all your finances for free with Personal Capital
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