Pepsi: Is This Dividend-Paying Stock a Buy Right Now?
June 29 2021 - 7:46AM
Finscreener.org
Pepsi (NASDAQ: PEP) is one
of the most popular brands in the world. Trading at a market cap of
$203 billion, this global behemoth has delivered consistent returns
for investors. In the last 10 years, PEP stock has returned 185%,
underperforming the S&P 500 that has returned over 300% in
this period.
However, Pepsi has managed to easily outpace inflation rates
while providing investors with a tasty dividend yield of almost 3%.
Comparatively, the S&P 500 Index has a yield of just 1.33%.
Let’s see if Pepsi stock should be part of your watchlist right
now.
Pepsi sales rose 2% in Q1
Pepsi’s organic sales in Q1 rose 2% year over year driven by
strong performance in its food and beverage divisions. However, it
was lower than the revenue growth of 6% in Q4 of 2020. Further,
Pepsi’s sales rose due to price increases rather than volume gains
in the March quarter. But investors should also note that in Q1 of
2020, people in most global markets stocked products during the
first wave of the dreaded pandemic which led to an 8% increase in
organic sales.
During the company’s quarterly earnings call, CEO Ramon Laguarta
said, “We successfully overcame challenges related to difficult
year-over-year comparisons, uneven recoveries across many of our
international markets, and weather-related business disruptions in
the U.S."
The increase in sales allowed Pepsi to end Q1 with an operating
profit of $2.3 billion, compared to less than $2 billion in the
year-ago period.
However, the management warned shareholders that earnings gains
will be modest in the upcoming quarters as Pepsi aims to increase
spending on its manufacturing and distribution networks. In Q1, its
net earnings rose by an impressive 14% year over year.
In the last year, Pepsi increased its debt to offset any
disruptions in its supply chain amid the pandemic. It ended the
quarter with a cash balance of $6.62 billion and $43.66 billion in
debt. The company also confirmed it will limit its buyback program
as it invests in core businesses.
What next for PEP stock investors?
Pepsi has been one of the dividend stocks on the S&P 500
and is just a year away from achieving the status of a Dividend
King. A dividend king company is one that has increased sales for
50 consecutive years. In the last 12-months, Pepsi distributed 86%
of its
free cash flow as dividends making another dividend increase
very likely in 2021.
Pepsi has a diversified portfolio of snacks and soft drinks and
is part of a recession-proof industry. Its cash flows are stable
and predictable allowing the management to keep increasing dividend
payouts each year. However, analysts expect Pepsi’s bottom-line to
decline as it upgrades its supply chain network and invests in
niches such as energy drinks.
Analysts expect sales to rise by 7.1% to $75.4 billion in 2021
and by 4.6% to $78.83 billion in 2022. This will allow the company
to increase earnings by 10.3% in 2021 and by 8% in 2022. Earnings
are also forecast to rise at an annual rate of 9.2% in the next
five years.
PEP stock is trading at a forward price to earnings multiple of
24x which might seem expensive given its earnings growth estimates.
Wall Street expects PEP stock to touch $155 in the next 12-months,
indicating an upside potential of 6%. After accounting for its
dividend yield, total returns will be closer to 9%.
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