Dividend Aristocrats Part 46: PepsiCo, Inc. (PEP)

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PepsiCo, Inc. (NYSE:PEP) is the second most valuable beverage company in the world based on its market capitalization of nearly $140 billion.

You can guess who the largest is

What sets PepsiCo apart from its slightly larger and slightly more iconic competitor (who shall not be named in this article) is PepsiCo’s snack brands portfolio.

All 8 of the company’s food brands that generate over $1 billion a year in sales are listed below:

– Lay’s

– Fritos

– Ruffles

– Doritos

– Quaker

– Cheetos

– Tostitos

– Walkers

With the name ‘PepsiCo’, you’d think that the majority of PepsiCo’s profits come from sodas (or beverages in general), but that is not the case. PepsiCo generates more than 50% of its operating income from food products, not beverage products.

In total, PepsiCo has 22 brands that generate over $1 billion a year in sales.

These brands were not build overnight… PepsiCo has a long corporate history.

Among the investors tracked by Insider Monkey, the sentiment towards PepsiCo has been stable. During the third quarter of 2015, the number of funds with long positions in the company remained unchanged at 57, while the aggregate value of their holdings amounted to $6.74 billion and represented nearly 5% of the company at the end of September. Among the largest shareholders of PepsiCo are Nelson Peltz’s Trian Partners and Donald Yacktman’s Yacktman Asset Management, which own 18.32 million shares and 17.80 million shares, respectively, according to their last 13F filings.

The company’s history can be traced back to 1893.

Pepsi was first sold as ‘Brad’s Drink’ in 1893. The soda was developed by Caleb Bradham in New Bern, North Carolina. In 1898, he renamed his soda – which is just a bit more marketable than ‘Brad’s Soda’. Pepsi Cola gets its name from the digestive enzyme pepsin and the kola nut which was used in the recipe.

PepsiCo (the corporation) was created in 1965 when Frito-Lay merged with Pepsi-Cola. The company has been extremely successful over the last 50 years.

PepsiCo’s long dividend history is evidence of the company’s steady growth. In total PepsiCo has paid increasing dividends for 43 consecutive years.

The company’s long dividend streak makes it a Dividend Aristocrat and subject of part 46 of the current 52 part Dividend Aristocrat series by Sure Dividend.

I am currently long PepsiCo. The first article to appear on Sure Dividend was an analysis of PepsiCo.

There’s little argument PepsiCo is a great business. I believe the combination of a great business and a great purchase price make for a favorable long-term investment.

Is PepsiCo fairly valued at current prices? The ‘valuation’ section below covers the company’s fair value.

PepsiCo’s Valuation

PepsiCo stock is currently trading for a price-to-earnings multiple of 20.7 (using adjusted earnings).

PepsiCo has historically traded for a premium of about 1.1x over the S&P 500’s price-to-earnings ratio.

Using PepsiCo’s historical premium multiplier of 1.1x and the S&P 500’s current price-to-earnings ratio of 19.8 implies a fair price-to-earnings ratio of 21.7 for PepsiCo.

PepsiCo is likely trading for around fair value at current prices; the company isn’t a bargain right now (it rarely is), but it isn’t wildly overvalued either.

There are 2 primary reasons why PepsiCo commands a higher price-to-earnings ratio than the average S&P 500 business:

  1. Safer business model
  2. Better expected total returns

Lower risk combined with better returns is the ‘holy grail’ of stock selection. Both of these factors are discussed in the following sections in this article.

Follow Pepsico Inc (NASDAQ:PEP)

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