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PepsiCo: A Time-Tested Dividend Aristocrat

PepsiCo: A Time-Tested Dividend Aristocrat

Alexey Novikov | Dreamstime.com

By Thursday, 17 October 2019 05:19 PM Current | Bio | Archive

Dividend growth stocks with competitive advantages are often the most rewarding stocks to hold over the long-term. High-quality businesses that can stand the test of time have the ability to reward shareholders with annual dividend increases, even during recessions.

For example, PepsiCo (PEP) is a Dividend Aristocrat that has raised its dividend payout each year for the past 47 consecutive years. We expect PepsiCo’s dividend to continue to increase annually, even if a recession is hits the U.S. economy. Its strong business model and ability to withstand a recession make PepsiCo a time-tested dividend growth stock.

Business Overview

PepsiCo is a global food and beverage company with a large portfolio of popular brands. Just a few of its core brands include Pepsi, Mountain Dew, Frito-Lay, Gatorade, Tropicana, and Quaker. The company generates $67 billion in annual sales, with just over 50% of revenue derived from food products.

PepsiCo has performed well in the years since the Great Recession ended. For example, since 2012 PepsiCo grew organic (currency-neutral) sales by approximately 3.8% per year. Along with margin expansion and share repurchases, this allowed PepsiCo to generate adjusted earnings-per-share growth of 9% per year in this period.

Naturally, PepsiCo’s dividend growth has run parallel to its adjusted earnings growth. PepsiCo has increased its dividend by 9% compounded annually since 2012.

The company is off to a good start to 2019. In the most recent quarter, PepsiCo generated 4.3% organic revenue growth. Over the first three quarters of the current fiscal year, PepsiCo has increased its organic revenue by 4.6%. In the core North America market, PepsiCo Beverages produced 3% organic growth last quarter due to higher prices, while Frito-Lay North America grew organic revenue 5.5%.

International growth is an added catalyst for PepsiCo, and has fueled the company’s growth again in 2019. International markets all saw improved sales results last quarter, led by 6% growth in Europe/Sub-Saharan Africa. Meanwhile, sales increased 2% in Latin America and 5% in the Asia/Middle East/North Africa geographic segment.

Competitive Advantages & Dividend Growth

PepsiCo expects to generate organic revenue growth of 4% to 6% over the long-term. Combined with modest margin expansion and share buybacks, the company also expects adjusted EPS growth in the high-single digits. We believe these are reasonable expectations for PepsiCo. While many other cyclical companies offer far less visibility for investors, PepsiCo’s stable business is capable of generating consistent growth even during recessions.

PepsiCo has strong competitive advantages, specifically its world-class brand portfolio. PepsiCo has more than 20 individual brands that each generate annual sales of $1 billion or more. PepsiCo is also a highly profitable company, with a shareholder-friendly management that is dedicated to raising the dividend each year. For 2019, PepsiCo expects to generate earnings-per-share of $5.50 with organic growth of at least 4% for the full year. With a current annual dividend payout of $3.82 per share, PepsiCo’s dividend is sufficiently covered. And, since most of PepsiCo’s products are recession-resistant in nature, the company should remain highly profitable even during an economic downturn.

Final Thoughts

Risk-averse income investors, such as retirees, typically look for consistency when it comes to the stock market. This can be hard to find, especially with volatile stocks in cyclical industries. PepsiCo is a pillar of stability, as it operates a global business model and owns a huge portfolio of category-leading brands. The company has raised its dividend for over 40 years in a row, and kept raising its dividend through each year of the Great Recession.

We expect PepsiCo to continue raising its dividend each year for many years to come. With a nearly 3% dividend yield, PepsiCo is an attractive long-term holding for risk-averse dividend growth investors.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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PepsiCo (PEP) is a Dividend Aristocrat that has raised its dividend payout each year for the past 47 consecutive years. We expect PepsiCo’s dividend to continue to increase annually, even if a recession is hits the U.S. economy.
pepsico, dividend, aristocrat, pep
Thursday, 17 October 2019 05:19 PM
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