PepsiCo: A Good Long-Term Stock But A Tightening Dividend Margin

Summary:

• PepsiCo has shown strong revenue growth, with a $7 billion increase in revenue in the past year.
• Net income for PEP has increased, with a positive sign in the second quarter of 2023.
• The Company has had a history of increasing dividends for the past 50 years, but the dividend payout ratio has increased in recent years.

When it comes to dividend investing, few stocks have a history as strong as PepsiCo (NASDAQ:PEP) (Pepsi). As an income-focused investor, I frequently look into companies that have a strong history of growing revenue and growing dividend payments. Pepsi is definitely a stock that fits into this category. However, a stock may not continue on an upward trajectory just because there’s a strong history. Where does Pepsi stand at this time?

Pepsi Financials

Growing revenue is a must for companies that pay dividends. Otherwise, the share price will likely start to suffer, along with the dividend payments. Pepsi has shown strong revenue growth in the recent past. Going back to the 2013 annual report, PEP reported $66.415 billion in revenue. The most recent annual report (2022) showed $86.392 billion, which was nearly a $7 billion increase over the previous year.

The most recent quarterly report showed a 10.4% increase in revenue over the same quarter last year. Part of this increased revenue comes from higher prices. Consumer staple companies like Pepsi have repeat customers, and some of their products, like Mountain Dew, have high levels of sugar and caffeine that are relatively addictive. People purchase the drinks and snacks Pepsi sells on a regular basis. They are sold in grocery stores, convenience stores, and restaurants around the world, and there is high demand that continues even when the economy is hurting. Therefore, when inflation ticked up last year, companies like Pepsi have the market and the power to increase their prices. Therefore, it shouldn’t be a shock to find that revenue increased fairly rapidly over the 2021 to 2023 time frame.

Even if there had not been a large uptick in inflation, Pepsi can still afford to raise its prices a little bit every year. As long as customer demand stays pretty stable, revenue should increase, as it has for each of the past six years.

In terms of net income, PEP had a relatively solid increase in 2022 to $8.91 billion. Over the past 10 years, this number has generally ranged in the $6 billion to $7.6 billion range, with a couple of outliers. For the second quarter 2023, net income increased from $1.429 billion to $2.748 billion, which is a positive sign. For the first six months of the year, net income dropped by a little more than $1 billion when compared to 2022. However, this resulted from a $3.3 billion cash infusion from the Pepsi’s sale of Tropicana and its juice products in early 2022. Divestments like that do not happen every quarter. Overall, the net income and revenue for the past year have increased quite a bit. PepsiCo is now estimating $7.47 in core EPS for 2023, which is an increase of 10% over the number from 2022. This number has shown growth since 2020.

One reason for a bit of concern is an increasing debt load. Overall long-term debt is about 1.5 times what it was in 2013, growing from $24 billion to nearly $36 billion. Therefore, debt has grown a bit faster than revenue, which has grown only 30% over the same time frame.

Shareholder Benefits

One of the reasons investors like PEP is the growing dividend. Indeed, Pepsi has increased its dividend for the past 50 years. Richard Nixon was president the last time the company did not raise its dividend. It’s always good to see a solid dividend history, and the company definitely ticks the box.

Back in 2013 and 2014, the dividend payout ratio for PEP was down in the 50% range. This has inched up to the 70% to 80% range for more recent years. Over the past five years, the company has increased its dividend an average of 7.12%, which has generally exceeded the growth in net income. At some point, companies have to adjust a dividend increase policy if revenue and income fail to increase at a level commensurate with maintaining rapid dividend increases. However, the most recent dividend increase came in at exactly 10% at $0.115 per share per quarter. This would indicate that Pepsi is bullish on the future, although it makes sense to watch this growth compared with revenue and income numbers. If the dividend increases too much, there could be lower increases in the future.

PepsiCo has also bought back shares in an attempt to benefit shareholders. Fewer shares means higher EPS numbers because fewer shareholders are left to split the company’s income. Over 2023, the company expects to purchase $1 billion of its own stock. Since 2013, the number of shares on the market has dropped from 1.541 billion to 1.380 billion. That’s a decrease of about 11%. It’s not as high as the percentage bought back by some other companies. Apple (AAPL) has decreased its share count (after accounting for splits) by around 40% over the same time. However, even this smaller decrease in the share count has a positive impact on EPS and, usually, a stock’s share price.

Conclusions

Pepsi is a foundational stock for many dividend growth investors because of its huge market presence with popular brands and its history of increased dividend payments over the long haul. In recent months, the company’s share price has dropped by more than $18 from a high of $196.88 to $178.45 (as of market close on August 17, 2023). Over the past year, it’s down about 1%, while the S&P 500 is up by about the same percentage. This is despite a solid couple of quarters. With a current PE ratio of 31, the company is more expensive than it’s been on all but a couple of occasions since 2001, although if EPS numbers for this year come in where the company expects, the current price would provide a 24 PE number (although the price will not stay static). The current price drop could provide a decent capital gain over the long run. It is definitely more attractive than it was at its high points over $190/share in May and July. Growing revenue and income make it a solid stock to hold. However, dividend growth might have to slow in the near future if the company does not continue seeing those important numbers grow at a fairly rapid pace, as the dividend payout ratio has creeped up in recent years. Dividend-focused investors should take this into account.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment professional. The preceding is intended for informational and educational purposes. Please make sure to perform due diligence before investing in equities, as losses up to all capital invested can occur.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.