This article originally appeared on The DIV-Net December 29, 2008.
Linked here is a detailed quantitative analysis of PepsiCo, Inc. (PEP). Below are some highlights from the above linked analysis:
Company Description: PepsiCo, Inc. (PepsiCo) is a global snack and beverage company. The Company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
PEP is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, PEP is trading at a 21.9% discount. PEP earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
PEP earned one Star in this section for 3.) above. PEP has paid a cash dividend to shareholders every year since 1952 and has increased its dividend payments for 36 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to >MMA
PEP earned both of the available Stars in this section. The NPV MMA Diff. of the $16,099 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as PEP has. If PEP grows its dividend at 13.0% per year, it will take 2 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.54%. PEP earned a Star since its Years to >MMA of 2 is less than 5 years.
Other: PEP is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. PEP’s global market positions and stable end markets produce consistent and strong cash flows. The company continues to find domestic and international growth opportunities. PEP’s product innovation strategy is considered trend-setting for the industry. Though carbonated soft drinks remain the most popular beverage, PEP recognizes that non-carbonated soft drinks are a faster growing category. The company is focusing on the health and wellness trends. It has eliminated trans fats from many of its snack foods, and is introducing “good for you” foods under the Quaker Oats brand. Risks include the highly competitive and very mature nature of it products, also with more exposure to foreign markets, political and currency risks also increase.
Conclusion: PEP earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks PEP as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $92.09 before PEP’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 1.79%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 6.4%. This dividend growth rate is well below the 13.0% used in this analysis, providing a reasonable
margin of safety.
PEP is a good value and and an excellent dividend stock. I will continue to add to my position below my buy price of $69.88. For additional information on PEP, including it dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in PEP (2.0% of my Income Portfolio) .
What are your thoughts on PEP?