Following an 11-month study of leaders in the food and beverage industry, the Drip Port has arrived at its fifth-ever purchase decision. Within the next five market days, Drip Port will send money to buy five shares of PepsiCo and enroll in its dividend reinvestment plan for free investments in more Pepsi stock and for free dividend reinvestment. Drip Port has several reasons for its buy decision, including Pepsi's attractive earnings growth potential.
By enrolling in the company's free dividend reinvestment plan, we are going to steadily accumulate a stake in the snack food and beverage giant PepsiCo (NYSE: PEP).
But wait. First, we need to enroll in the company's Drip plan. To do so requires owning at least five shares of Pepsi's stock in our name, not the broker's name. Since Pepsi doesn't have a direct purchase plan (where you buy even your first shares directly from the company), we'll be buying our first five shares through a Drip service. You can also buy your first shares (however many you wish) from a discount broker; however, you must register at least five shares in your name to qualify for Pepsi's Drip. If you're buying any stock for a Drip, ask your broker what this will cost before you leap. There's no need to pay more than $20 for the trade and the registration combined.
We're using the services of Temper of the Times for our Pepsi transaction. The fee to buy initial shares of a company's stock and have Temper enroll you in the company's Drip is $20 for nonsubscribers to Temper's MoneyPaper service (that's us) and $15 for subscribers.
So, we'll buy our first shares of Pepsi through Temper. We'll send our money (about $230, which includes the fee and a price cushion in case the stock rises) to buy our first five shares within the next five market days. (Remember that we saved our money the past few months to make a new purchase. We'll eat a little into next month's money, too.)
For much more information about PepsiCo's dividend reinvestment plan, visit http://www.pepsico.com and click on "shareholder information" on the top of the page.
Our dozens of columns that led to our purchase decision are linked below and will stand for eternity (well, at least for the next 17 years, we hope) as our official "buy report." But now, before we summarize our main reasons for our purchase, a Foolish reminder is in order!
The purpose of the Drip Port isn't to show off anyone's stock-picking abilities or lack thereof. Instead, we're here to help teach you about very low-cost investing, dollar cost averaging, and dividend reinvestment. We're here to teach you, or to remind you, that you can do this stuff yourself; that you don't need a lot of money to start or to eventually make a lot of money; and that the best person to manage your money, if you have any desire to, is you!
Drip Port should instead be called "Drip Strategy," because we're here to teach a strategy much more than show off a portfolio. Our portfolio is only a living, real-money example of the strategies that we teach, and that we all collectively celebrate as Drip investors. And our portfolio is just one small example from an endless variety of strong Drip portfolios that exist the world over. There is no "right" portfolio. Only what is right for you. This means that you must make all of your own investment decisions.
Now, why we decided to buy PepsiCo can be boiled down to key points that we addressed in our columns over the past months. The highlights include:
1) We have a comfortable and good understanding of the business, which means that we should be able to continue to learn more about it indefinitely.
There is much more behind our decision, as the links below demonstrate.
2) Based on current information, Pepsi's valuation appears reasonable based on its business potential, and (much less importantly) compared to the S&P 500 index and leading peers.
3) We see the potential for consistent double-digit earnings per share growth.
4) Pepsi has several "levers" that it can push and pull in order to grow earnings per share, including multiple category-killer products and evidence of pricing power.
5) The company has ample growth opportunities. Pepsi is mainly a domestic powerhouse, but even domestically it has room to grow, especially in snack foods.
6) Management has shown great skill in recognizing value (for one, the purchase of Tropicana has already proven smart) and in refocusing the business.
7) We expect Pepsi's margins to slowly but steadily expand and its return on invested capital (ROIC) to improve.
8) We hope for expansion of Pepsi's price-to-earnings (P/E) multiple, or (more realistically) on average the current earnings multiple could be sustained for a long time, meaning the stock will appreciate with earnings per share growth. This scenario is much better than earnings multiple contractions, whereby a stock depreciates for many years even when earnings rise. This happens to many companies and it can happen over many years, indicating that shares were priced too aggressively. Pepsi's stock isn't cheap, but based on current information, we're comfortable with the amount of downside risk that we think is possible.
We'll end today by saying that we hope to dollar cost average into PepsiCo for at least 17 years. As with our other investments, we'll buy more stock when the shares are lower, and less stock when shares are priced higher. The minimum investment in Pepsi's plan is $25, and the plan buys shares twice a month. The fee for purchases is $0, and the fee for dividend reinvestment is nil, because Pepsi covers the fees. If the plan should ever institute fees, we'll consider using a service like BuyandHold.com or we'll suspend investing as we've done with another plan in the past. We don't think this will happen, though. Right, PepsiCo?
So, welcome to Drip Port, PepsiCo! You know what Brian and I have a thirst for right now? That's right. A beer.
Drip Port's Food and Beverage Industry Study
and PepsiCo Purchase Decision:
07/07/00: Three Pepsi Earnings Models
06/28/00: Could Pepsi Be Your Next Coke?
06/23/00: Your Food and Beverage Pick
06/16/00: Will Pepsi Be a Rule Maker? Part 2
06/14/00: Will Pepsi Be a Rule Maker?
06/09/00: What's PepsiCo Worth?
05/31/00: Can PepsiCo Beat the S&P 500?
05/26/00: PepsiCo Is 70% Frito-Lay
05/12/00: Pepsi & Wrigley's Cash King Margin
05/10/00: Pepsi & Wrigley's Foolish Flow Ratios
04/26/00: Pepsi's First Quarter 2000 Results
11/23/99: Jeff's Food & Beverage Pick
11/19/99: Brian's Food & Beverage Pick
11/10/99: Philip Morris Butted Out
11/09/99: Brown-Forman Shown the Door
10/29/99: Brown-Forman Analyzed
10/27/99: IFF Not Choosen
10/15/99: IFF's Iffy Growth
10/14/99: IFF Introduced
10/08/99: Heinz Part 3
10/07/99: Heinz Part 2
09/24/99: Kissing Hershey Good-Bye
09/22/99: Hershey Part 2
09/15/99: Wrigley's Value Part 4
09/14/99: Wrigley's Value Part 3
09/10/99: Wrigley's Value Part 2
09/09/99: Wrigley's Value
09/02/99: Wrigley's Earnings Quality
09/01/99: Wrigley's Return on Invested Capital
08/31/99: Wrangling With Wrigley
08/24/99: Wrigley's Biz Performance
08/19/99: Pepsi vs. Coke Part 3
08/18/00: Pepsi vs. Coke Part 2
08/17/99: Pepsi vs. Coke
08/13/99: Pepsi's Growth Challenge
08/12/99: Pepsi Intro
08/09/99: Coca-Cola Passes Round One
08/06/99: Coke's "Kooky" Valuation
08/05/99: Can Coca-Cola Beat the S&P 500?
08/04/99: A Coca-Cola Wake-up Call
08/03/99: Drip Port's Food & Beverage Study Begins