The board of PepsiCo, Inc. (NASDAQ:PEP) has announced that it will be increasing its dividend on the 31st of March to US$1.08. This takes the annual payment to 2.6% of the current stock price, which is about average for the industry.
PepsiCo's Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, PepsiCo's was paying out quite a large proportion of earnings and 90% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.
Looking forward, earnings per share is forecast to rise by 9.2% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 73% by next year, which is in a pretty sustainable range.
PepsiCo Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the dividend has gone from US$2.06 to US$4.30. This means that it has been growing its distributions at 7.6% per annum over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.
PepsiCo May Find It Hard To Grow The Dividend
The company's investors will be pleased to have been receiving dividend income for some time. However, PepsiCo has only grown its earnings per share at 4.8% per annum over the past five years. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. This isn't the end of the world, but for investors looking for strong dividend growth they may want to look elsewhere.
In Summary
Overall, we always like to see the dividend being raised, but we don't think PepsiCo will make a great income stock. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. We don't think PepsiCo is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for PepsiCo that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
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