PepsiCo, Inc. (PEP) Is A Dividend Machine To Hold Forever

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PepsiCo, Inc. (NYSE:PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend champion, which has increased distributions for 44 years in a row.

The most recent dividend increase was in February 2016, when the Board of Directors approved a 7.10% increase in the quarterly dividend to 75.25 cents/share. PepsiCo’s largest competitors include The Coca-Cola Co (NYSE:KO) and Dr Pepper Snapple Group Inc. (NYSE:DPS).

Investors tracked by Insider Monkey appear to have been pleased with the dividend increase, as there was a greater than 10% jump in the number of shareholders of the stock, to 65. Those investors held 4.00% of Pepsi’s shares, valued at just under $6.00 billion. Among the top shareholders of Pepsi were value investor Donald Yacktman of Yacktman Asset Management and Cliff Asness’ quant fund AQR Capital.

Over the past decade, this dividend growth stock has delivered an annualized total return of 8.70% to its shareholders.

The company has managed to deliver a 4.40% average increase in annual EPS over the past decade. This figure looks lower than it should be, because of one-time charges of 91 cents/share related to deconsolidation of its Venezuelan business, which depressed ending 2015 earnings. PepsiCo is expected to earn $4.72 per share in 2016 and $5.11 per share in 2017. In comparison, the company earned $3.67/share in 2015.

Share buybacks have resulted in the decrease in outstanding shares from 1,686 million in 2006 to 1,474 million in 2016. A history of consistent share repurchases is helpful, because it shows that the company is willing to help out long-term holders of stock with increased proportional share of earnings and the business over time.

PepsiCo, Inc. (NYSE:PEP) has a wide moat, due to strong recognizable brands it owns, scale of operations, relationships with retailers and having a distribution network of bottlers that will take billions of dollars to create and replicate. Because of the consumer affinity for branded snacks and beverages that PepsiCo makes, they are less likely to switch to a cheaper product. Hence, PepsiCo is part of a sort of unregulated monopoly, which also has some pricing power.

The company has a solid distribution network, a portfolio of strong brand names, and solid relationships with retailers. This portfolio also includes 22 brands with sales of at least $1 billion for each brand. The market dominance in the snack business of Frito-Lay has resulted in higher margins, relative to competitors.

Future growth in earnings will come from international expansion, particularly in emerging markets. The number of servings that consumers abroad consume is much lower than that in North America, which is why I believe there will be years of growth ahead. In addition, I like the fact that the company sells not only beverages, but snacks as well. As an investor, I like to be diversified; hence, I like it when the companies I own are diversified in products and geography. It is estimated that the company achieves significant synergies by operating both a beverage and a snack business.

Earnings can also increase through organic growth for those snacks and beverages, and price increases to offset cost pressures. Strategic cost initiatives to streamline operations, increase productivity and reduce redundancies are another tool to increase shareholder earnings.

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