Dividend Analysis - Pepsico Inc (NYSE:PEP)
12 July 2007Having performed an analysis on the Coca Cola Company, I thought it would be interesting to analyze its competitor Pepsico Inc. Pepsico Inc trades on the NYSE under the symbol PEP.
Company Profile:
From Yahoo Finance
PepsiCo, Inc. operates as a snack and beverage company.
For a more detailed look at the company profile including all the national brands, check out Yahoo Finance.
This is a large cap stock with a market capitalization of $107.69B and employs over 168,000 employees.
Company Fundamentals:
Over the last decade, Pepsico Inc’s management has delivered excellent return on invested capital. Other than 1997, every other year is over 20% and 6 of the 10 years are over 25%. The 5 year average ROIC is 27.50%. Very impressive.
Return on equity is equally impressive. The 10 year average ROE is 29.91% and the 5 year ROE is 31.71%.
Equity growth rate has been fairly consistent. Over the 10 year period, the average equity growth rate is 9.52%. It has improved in recent years with the 5 year average being 14.72%. However, the last couple of years have brought it back in line with the 10 year average.
Earnings per share growth rate has been even more consistent. Over the 10 years, the average is 12.64%. Over 5 years, it is 12.12%. Over 3 years, it is 12.51%. And last year? 11.11%. I would say that is pretty consistent.
Sales growth rates have also been consistent in the 6%-7% range.
Dividend Fundamentals:
Pepsico Inc currently has a dividend yield of 2.28%. Basically running at the same dividend yield as the DJIA. So this is an average dividend yield.
Dividend growth rates had been anemic at best from 1997 to 2003. Growth rates were sitting at lower than 6%. However, the last 3 years have really outperformed with growth rates of 34.92%, 18.82%, and 14.85% respectively. Is this the new trend? I think it might be too early to decide.
The dividend payout ratio is sitting at 38.67% (compared to Coca Cola’s dividend payout ratio of 57%). Fairly conservative and gives management room to maneuver and maintain the high dividend growth rate of recent years.
And the cash flow growth rate has been pretty steady over the last 5 years in the 10% range.
Valuation Models:
From a dividend yield perspective, Pepsico Inc. is currently yielding an all time high! So obviously, this stock is going to be selling at a discount today. The 5 year average high dividend yield is 1.88%. If that is what we demand as investors, then the model price is $79.76. At today’s price of $65.87, the stock is selling at a discount of 17%.
Now, the Graham number shows a different story. This model price works out to $25.44. So now, the stock is selling at a premium of 159%!
Let’s see if we can use the discounted present value method to break this tie. The inputs used for the calculation were:
- future P/E of 21.02. This was determined from the most conservative P/E which happens to be the 5 year average. The current P/E is 21.60 so it is not far off.
- future EPS growth rate of 9.52%. This was determined by taking the most conservative EQUITY growth rate which was the 9 year average. The analysts have forecast 11%. So I am in the right ball park, but slightly on the more conservative side.
- constant dividend yield of 1.88%
- future dividend growth rate of 14.85%. Now, this one may be too aggressive. This is the 5 year average dividend growth rate. But like I said, only the last 3 years have been high dividend growing years.
With these inputs, our model price works out to $49.87 which implies a premium of 32% over the current price.
See my calculations here.
Conclusion:
Interestingly enough, our valuation methods show conflicting signals. From a yield perspective, Pepsico Inc has never looked as good as it does today. However, the other two methods show that the stock is currently overvalued.
I do tend to favour the yield method of determining a model price for my dividend payers and I use the other two valuation methods to put some perspective on the stock when comparing it to other dividend payers that are also paying their high dividends.
What to do with Pepsico Inc? You can find stocks with higher yields and higher dividend growth.
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