PepsiCo (PEP) has been a strong performing consumer goods stock over the last three years. In that time, Pepsi stock is up 59%, beating the Consumer Staples Index by more than 3 percentage points and the S&P 500 by more than 6.
The important thing to realize here along with PEP’s outperformance is the $24 billion returned to shareholders via dividends and share buybacks over the same three-year period.
That’s why Pepsi stock has beaten the market, and it’s a big reason why it will down the road.
Strong Dividend Payments and Buybacks
PepsiCo, Inc. has been one of the most consistent dividend payers in the consumer goods sector. The company has raised its dividend an average of 9% over the past three years. Along with generous cash dividends, Pepsi is also buying back huge amounts of its own stock to increase earnings per share. In the past 10 years, PepsiCo has spent more than $65 billion in share buybacks and dividends.
In fiscal 2015, PepsiCo paid $4 billion in dividends and also bought back $5 billion in Pepsi stock.
Pepsi recently announced its 44th consecutive dividend increase. The new quarterly payout, which was an increase of 7%, will take place in June 2016 and brings the company’s annual dividend rate to $3.01 annually. That puts Pepsi’s current yield at around 3%.
The cash faucet will keep flowing this year. PEP plans on spending $7 billion in fiscal 2016, with $4 billion devoted to dividends and $3 billion coming from continued share buybacks.
Sizing Up PepsiCo Versus Peers
Coca-Cola: KO currently yields 3.2%, which is more than Pepsi. Coca-Cola also has a long history of increasing dividends annually, boasting 53 years of consecutive dividend increases. Coca-Cola increased its dividend payment 8.9% in 2014 and 8.2% in 2015. Both of these figures lagged Pepsi, which increased its payout 10.6% in 2014 and 11% in 2015. The other key figure here is Coca-Cola pays out 73% of its earnings in dividends. Pepsi’s payout ratio is closer to 60%, giving it more room to invest in growth and also more room to continue to increase its dividend payment at a higher rate.
Dr Pepper Snapple Group: DPS shares yield 2.3%, trailing the yield of PepsiCo by a significant margin. However, Dr. Pepper Snapple has increased its dividend each of the past six years, including an impressive 14.9% in 2015. Dr. Pepper Snapple Group also pays out only 49% of earnings as dividends, leaving even more room for big increases.
PepsiCo is something of a Goldilocks payer in the space, then, offering a much more significant dividend than DPS, with a yield that’s only slightly less than KO.
Strong Financials for PEP
A few highlights from the last fiscal year:
- Pepsi’s revenues were $63 billion
- Organic revenue grew 5% year-over-year
- Operating margins increased 15.8%
The company continues to thrive with its key brands; -Pepsi has 22 brands that generate more than $1 billion in annual sales.
Pepsi’s long-term plan to spend on growing dividends and stock buybacks should end up benefitting shareholders. The company also sees organic revenue growing in the mid-single digits, margins gaining 30 to 50 basis points annually, and earnings per share growing in the high-single-digit range annually. PepsiCo also sees productivity savings of around $1 billion annually through 2019 (PDF).
Time to Buy Pepsi Stock
Pepsi stock is off to a so-so start in 2016, with shares basically flat against a market that’s down a couple percent. That also comes after a 2015 in which shares gained just 6% — a significant slowdown from the 15% increase they saw in 2014.
Still, PEP is bouncing well off its mid-January trench, and is making an advance on the stock’s all-time highs around $103 — and a break above that could really send shares shooting higher. Meanwhile, you’re still sitting on a good — not spectacular, but good — dividend, even at current prices.
The old saying of “if it’s not broke, don’t fix it” seems to apply here. Investors should take a hard look at PepsiCo stock now.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.