This article originally appeared on The DIV-Net August 24, 2009.
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.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $55.10. PEP did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
PEP earned two Stars in this section for 2.) and 3.) above. PEP earned a Star as a result of its most recent Debt to Total Capital being less than 45%. PEP earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1952 and has increased its dividend payments for 37 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 a Star in this section for its NPV MMA Diff. of the $796. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PEP has. If PEP grows its dividend at 7.6% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. PEP earned a check for the Key Metric ‘Years to >MMA’ since its 4 years is less than the 5 year target.
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. Compared to it peers, 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 did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks PEP as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $65.62 before PEP’s NPV MMA Differential fell to the $500 that I like to see for a stock with 37 consecutive years of dividend increases. At that price the stock would yield 2.70%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.3%. This dividend growth rate is lower than the the 7.6% used in this analysis, thus providing a margin of safety. PEP has a risk rating of 1.00 which classifies it as a low risk stock.
Like its competition Coca-Cola (KO), PEP’s Free Cash Flow Payout, currently at 70%, tends to remain higher than the 60% level that I prefer. However, this is mitigated to an extent by relatively low debt levels and predictable cash flows. PEP is a stock I will buy, as my allocation allows and when it dips below its buy price of $55.10. For additional information, including the stock’s 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 (3.3% of my Income Portfolio).
What are your thoughts on PEP?