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

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Pepsi’s Dividend Growth Score is 71, which indicates that the company’s dividend growth potential is above average.

Pepsi has increased its dividend for 44 consecutive years and last raised its dividend by 7.1% in July 2016. The company has paid uninterrupted dividends since 1965 and is a member of the dividend aristocrats list.

As seen below, Pepsi has consistently delivered annual dividend growth in the high-single to low-double digits.

Pepsi’s future dividend growth will likely remain between 6% and 9% annually. Solid future dividend growth is supported by the company’s healthy payout ratio (56% of free cash flow) and outlook for high-single digit earnings growth.

Valuation

Pepsi’s shares trade at a forward-looking P/E ratio of 19.8 and offer a dividend yield of 2.9%, which is slightly higher than the stock’s five-year average dividend yield of 2.8%.

PepsiCo, Inc. (NYSE:PEP) targets mid-single digit organic revenue growth and core, constant currency earnings per share growth in the high-single digits. I believe these targets are achievable given Pepsi’s track record, the underlying growth rates of its large markets, and its moderate global market share.

Under these assumptions, Pepsi’s stock appears to have potential to deliver annual total returns of 9-12% (2.9% dividend yield plus 6-9% annual earnings growth). The stock’s current multiple (19.8) isn’t a bargain, but it appears reasonable to me considering Pepsi’s excellent stability, great business quality, and opportunities for long-term growth.

Conclusion

Unlike many large cap consumer staples companies, Pepsi’s outlook for long-term earnings growth is quite positive. While the consumer health trend should continue being watched, Pepsi’s diversified snack and beverages portfolio, more limited exposure to soda, investments in innovation, and exposure to international markets helps mitigate these concerns.

While the stock doesn’t appear to be cheap today, I think it offers reasonable value for long-term investors building a high quality dividend growth portfolio.

Disclosure: None

Additional Links:

(1) http://www.simplysafedividends.com/top-dividend-stocks/

(2) http://www.simplysafedividends.com/dividend-growth-investor/

(3) http://www.npr.org/sections/thesalt/2016/11/09/501472007/souring-on-sweet-voters-in-4-cities-pass-soda-tax-measures