PepsiCo Dividend Stock Analysis (PEP)

Description

Sector: Consumer Defensive
Industry: Beverages – Soft Drinks

PepsiCo (PEP) is the global leader in the manufacture, marketing, and distribution of beverages (50%) and snacks (50%). The company is # 2 only to Coca-Cola in beverages, and # 1 in snacks. Profits are derived evenly (approx. 50/50) from the United States and international.

The company concentrates on convenience items that “go from package to consumption in seconds”. PepsiCo divides itself into 6 segments:

PepsiCo America Beverages (32% of Revenues)
Frito-Lay North America (22%)
PepsiCo Europe (20%)
Latin America Foods (12%)
PepsiCo AMEA (Asia Middle East Africa) 10%
Quaker Foods North America (4%)

The product portfolio of PepsiCo includes the following 22 brands with annual sales in excess of 1 billion:

SWOT Analysis For PepsiCo

Strengths

PepsiCo has a wide economic moat because of its dominant snack brands. Competitive advantages include economies of scale, an adapting product line, strategic assets, and barriers to entry.

The company estimates $1 billion in synergies due to the the marketing and distribution of snacks and beverages together. This is substantial savings for a company that earned between 4 and 7 billion dollars each of the last 10 years.

Weaknesses

The Carbonated Soft Drink beverage market is declining in developed markets due to changing consumer demands favoring more healthy options.

Opportunities

The dominating distribution network and marketing prowess of PepsiCo allow it to successfully add products that are gaining favor with consumers.

Threats

At home single-serve are taking market share from traditional conventional bottles and cans of carbonated beverages. Governments are toying with taxes on sugary products to raise revenue. In a few cases attention is being put on reducing consumption to try and force a more healthy lifestyle on citizens.

Dividend Analyzer Checklist

(updated January 2017)

Dividend Safety Score (15/33 points)

Dividend Per Share (ttm): $2.91
Dividend Payout Ratio (ttm):  63%
Dividend Per Share (10 Year Growth):  10.6%
Cash From Operations (CFO) Per Share (ttm):  $7.13
CFO Dividend Coverage (CFO / DPS):  2.5  (2/6 points)
Free Cash Flow (FCF) Per Share (ttm):  $5.17
FCF Dividend Coverage (FCF / DPS):   1.8   (3/6 points)
Net Financial Debt:  $20826  M
Total Assets:  $73897  M
Net Financial Debt / Total Assets:   28%  (5/12 points)
Net Financial Debt to EBITDA (ttm):  285%
Total Liabilities to Assets Ratio (Qtr.):  83%
Piotroski Score (1-9) (TTM): (5/9 points)

Profitability & Growth Score (26/33 points)

Revenue (10 Year Growth) *CAGR > 4.14%:  6.8%  (4/4 points)
EPS Basic Cont. Operations (10 Year Growth) CAGR > 4.14%:  4.3% (4/4 points)
Cash From Operations (10 Year Growth) CAGR > 4.14%:   6.1%  (6/6 points)
Operating Earnings Yield (ttm):  6.3%   (2/7 points)
Net Income (ttm):  $6646 M
Gross Profit (ttm):  $34464 M
Total Assets:  $73897 M
Gross Profitability Ratio = GP / Total Assets:  47%  (10/12 points)
Cash Return On Invested Capital (CROIC)(tttm):  16%
Return on Invested Capital (ROIC):  14%
Return on Invested Capital (ROIC) (5 Year Median):  13%
Return on Invested Capital (ROIC) (10 Year Median):  13%

Valuation Score (14/34 points)

Free Cash Flow Yield (ttm):  4.9%  (5/9 points)
EV to EBIT (ttm):  17.6 (3/9 points)
EV to EBITDA (ttm):  14.2   (3/9 points)
PE10:   27.6   (3/7 points)
Price to Sales Ratio (ttm):  2.3
Price to Book Value (ttm):  11.3
Price to Earnings Ratio (P/E) (ttm):  21.7

TOTAL POINTS – (55/100) (50 is an average score)

*Compound Annual Growth Rate (CAGR)
**A Compound Annual Growth Rate of 4.14% = a 50% gain over 10 years.

Conclusion

(updated January 2017)

Type of Investor / Recommendation

Large Diversified Dividend Portfolios / Should be Considered
Looking For Exposure to Consumer Defensive Sector / Average Option
Deep Value Investors / AVOID

PepsiCo is ranked #90 (out of 247) overall and #16 (out of 30) in the Consumer Defensive sector by the Dividend Analyzer.

The long term Profitability & Growth of PepsiCo is remarkably stable and solid. However, the leveraged balance sheet makes its Dividend Safety Score average and the Valuation is expensive. Overall, PepsiCo. is a more attractive investment than Coca-Cola (KO)  at current prices.

Portfolio Position Disclosures:
DVB Foundation Portfolio – None
DVB Dividend Growth – None
DVB High Income – None
Arbor Asset Allocation Model Portfolio (AAAMP) – None

Disclaimer:
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.