PepsiCo: 50th Yearly Dividend Increase To $1.15/Qtr (NASDAQ:PEP)

PepsiCo, Inc. (NASDAQ:PEP), one of the largest manufacturers and distributors of snack food and beverages, is a buy for the dividend income growth investor. PepsiCo has steady growth and has plenty of cash, which it uses to buy bolt-on companies, add new products, and increase the dividend each year. I think this is an opportunity to buy a great defensive company at a fair price if you do not have a company position. PEP is 0.9% of The Good Business Portfolio, and my IRA portfolio of good business companies is balanced in all styles of investments.

As I have said before in previous articles:

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article “The Good Business Portfolio: Update to Guide-lines, March 2020“. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keep me ahead of the Dow average.

Fundamentals

PepsiCo is a great investment for the moderate growth investor and dividend income growth investor and is now a Dividend King that wants a SWAN (sleep well at night) investment. A quote from the 2nd quarter earning call by the CEO Ramon Laguarta sums up the business productivity as the impact of the COVID pandemic is controlled, helping the company get back to normal.

In terms of cost, as you know, our first focus, whenever we’re faced with inflation, is to try to drive incremental productivity on our internal costs. And I think we’ve been doing a pretty good job of that. I mean, we’ve seen this year some of the strongest productivity we’ve seen in a number of years. That puts us in a relatively better position when we’re faced with commodity inflation because we’re not necessarily forced to price it all through. We can take a more consumer-centric approach to deal with inflation and the subsequent pricing. Balance of the year inflation is higher than it is for the first half of the year. I think we’ve mentioned in the past that we’re in the teens in terms of commodity inflation. That will continue, but a little bit higher in the back half. But we do expect stronger productivity in the back half as well. So I think from an overall cost outlook, our guidance certainly captures all of that, and I think it puts us in a position where we’ve got high confidence in delivering the year.

This shows the feelings of the CEO and the continued growth of the PepsiCo business and shareholder return via increased earnings and revenues. PepsiCo has good growth and will continue as the focus of the pandemic gets controlled by the vaccines distributed worldwide. The S&P CFRA PepsiCo’s one-year price target is $200.00, with a buy rating of four stars, giving you a possible gain of 17% in a year and making PepsiCo a good buy at this time. The projected one-year P/E is a bit above average at 25, which shows PepsiCo’s prospect of growth. PepsiCo is a large-cap company with a capitalization of $236 billion, well above my guideline target of at least $10 billion. My PepsiCo 2022 projected increase of 10% operating revenue is good for a solid growing income and a defensive company.

One of the major reasons to own PepsiCo is to have a company with increasing growth as the COVID virus is controlled and as workers get back to their jobs in the United States, PepsiCo has an above-average dividend yield of 2.9% and has had increases for 50 years in a row, making PepsiCo a great choice for the dividend income growth investor that wants growing yearly income. The five-year average payout ratio is high at 75%, which allows cash to remain for increasing the business of the company by increasing the varieties of existing products, adding new products, and buying bolt-on companies that provide company growth that brings value to the stockholder.

I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter, on July 12, 2022, PepsiCo reported earnings that beat expected at $1.86 by $0.12, compared to last year at $1.72. Total revenues were higher at $20.27 billion, increasing 5.3% compared to last year, and beat total revenue by $724 million. This was a great report with a bottom-line and the top- line beating expected with a beat compared to last year. The next earnings report, Q3, will be out in October 2022 and is expected to be $1.92 compared to the previous year at $1.79, a good increase.

One method I use to compare companies is to look at the total return compared to the market. The good PepsiCo’s total return of 101.36% compared to the Dow base of 74.62% over my 78-month test period makes PepsiCo a good investment for the total return investor. Looking back five years, $10,000 invested five years ago would now be worth over $17,200 today. This gain makes PepsiCo a good investment for the total return investor looking back, which has future growth with increased earnings as the COVID-19 virus is controlled in the United States, increasing the interest in PEP’s products. Sports events on TV and live are increasing, which will increase the want for more of PEP’s snacks and drinks.

One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is good and getting better, and the above-average dividend income makes PepsiCo a good business to own for yearly growth in a business that is defensive. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a good income stream. Most of all, what makes PepsiCo interesting is the long-term growth of its drink and snack business worldwide which is expanding in foreign countries. The graphic below shows some of the brands that PEP sells. The drink business complements the snack business; a can’t-lose combination.

Risks and Negatives of the business

PepsiCo has great products, and they keep adding new varieties to existing products, developing new products that increase their sales. Still, there is always the risk of a new product failing. As more businesses and people get back to work, PEP’s earnings should continue their steady growth unless they are impacted by new varieties of the COVID virus. There is also always the risk of government regulation that could hurt PepsiCo’s product development and cause a decrease in earnings. The last factor is the exchange rate to the dollar since PEP has a worldwide business.

Conclusions

PepsiCo is a great investment choice for the dividend growth investor with its above-average yield and 50 years of dividend increases. The Good Business Portfolio will hold the PEP position and add to the position if cash is ever available. If you want a strong, safe dividend growth company in the drink and snack business, PepsiCo may be the right investment for you, with a possible gain of 17% in a year

The Good Business Portfolio’s total return is behind of the Dow average from 1/1/2022 to July 15 by 3%, which is a loss below the market loss of 13.76% for a total portfolio loss of 16.76%. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance. The latest article is titled “The Good Business Portfolio: 2022 First Quarter Portfolio Review.” We still have 5.5 months left in the year for the mid-term selections to make a profit.