PepsiCo, Inc. (PEP): A Top Dividend Growth Stock For Long-term Investors

PepsiCo, Inc. (NYSE:PEP)’s Dividend Safety Score of 99 indicates that the company’s dividend payment is one of the safest in the entire market. Pepsi’s excellent dividend safety begins with the company’s payout ratio.

Pepsi’s dividend has consumed just 56% of its free cash flow over the last four quarters. This is about in line with the company’s historical payout ratios, which have remained between 40% and 60% for more than a decade. Such stability is usually the sign of a steady business with reliable earnings and dividends, and Pepsi is no exception.

Source: Simply Safe Dividends

Speaking of business stability, another factor helping Pepsi’s strong Dividend Safety Score is its performance during the last recession. Pepsi’s sales were roughly flat in 2009, and the company’s free cash flow per share managed to grow each year.

Consumers keep buying the company’s products even when times are tough. Pepsi’s stock also outperformed the S&P 500 by 11% in 2008, highlighting its defensive qualities.

Source: Simply Safe Dividends

Free cash flow generation is another important factor that impacts dividend safety. Without positive free cash flow, a business is not able to sustainably pay dividends without depending on capital markets to issue debt and equity.

My favorite dividend stocks reliably generate positive, growing free cash flow each year. Pepsi certainly checks that box. It free cash flow per share has steadily climbed from $2.46 in 2005 to $5.33 in 2015, more than doubling. Pepsi’s economies of scale and powerful brands make it a cash flow machine, fueling safe and steady dividend growth.

A company’s balance sheet is another very important impacting a dividend’s safety because companies will always meet their debt obligations before paying dividends.

Fortunately, Pepsi has a great balance sheet with nearly $15 billion in cash compared to $29 billion in debt. The company could cover its total debt using cash on hand and just 1.5 years’ worth of earnings before interest and taxes (EBIT).

Not surprisingly, Pepsi maintains an “A” credit rating from Standard & Poor’s. The company has plenty of flexibility to continue paying dividends, reinvesting for growth, and acquiring new brands.

Overall, Pepsi’s dividend is extremely safe. The company has a healthy payout ratio, generates consistent free cash flow, performs well during recessions, and maintains a strong balance sheet.