Mindlessly replicating the investment decisions of others is hardly a sound recipe for long-term success in the market, so investors should always do their own research before buying or selling a particular stock. However, taking a look at what the big money managers are doing can be a smart way to find attractive investment ideas for your own portfolio.
In that spirit, we have tracked the investment decisions of a wide variety of hedge funds, in many cases led by massively successful billionaires, and the big money seems have a considerable appetite for PepsiCo (PEP 1.64%) stock lately. According to regulatory filings, eight different hedge funds bought nearly 5.3 million shares of PepsiCo in the first quarter of 2016.
Investing professionals can make mistakes just like everyone else, in fact, they often do. Nevertheless, there are some strong reasons to consider PepsiCo a top-quality dividend stock to buy and hold for the long term.
A healthy business
PepsiCo comes well behind Coca-Cola (KO 2.34%) in the soda wars. Coca-Cola owns both the first and second market share positions in the U.S. with its flagship Coca-Cola and Diet Coke products, while PepsiCo comes in third place with Pepsi. However, soft drinks are not a particularly promising business, far from that, soda consumption in the U.S. is on a long-term decline due to health considerations. Per capita consumption of carbonated soft drinks dropped to the lowest level since 1985 last year, and there is no reason to expect a reversal in the trend anytime soon.
Most of the growth opportunities in the industry are currently coming from drinks and snacks targeted toward health-conscious consumers, and PepsiCo is doing a sound job at adapting to changing consumer demand over the last several years.
Management tracks performance for two kinds of healthy product categories. "Everyday nutrition" are products that provide healthy nutrients, such as grains or fruits and vegetables in addition to products that are naturally nutritious, like water and unsweetened tea. These products currently account for nearly 25% of PepsiCo's total revenue.
The "guilt-free" product category includes everyday nutrition products plus diet beverages and other drinks and snacks with low calories or reduced levels of sodium and saturated fat. This category represents nearly 45% of total sales for PepsiCo nowadays. In a sign of the times, PepsiCo is now making less than 25% of sales from traditional soft drinks, and brand Pepsi accounts for a modest 12% of revenue.
The company is aggressively investing in research and development to create better sweetener solutions and healthier versions of existing products, while also transforming its packaging to offer reduced calories per serving. Mountain Dew Kickstart is a remarkable success story in this area, now in its third year, Kickstart produced over $300 million in retail sales during 2015, while sales volume increased by an impressive 34% in the first quarter of 2016.
Foreign currency fluctuations are hurting financial performance, but PepsiCo still announced a solid increase of 3.5% in organic revenue during the first quarter of 2016. Global snacks organic volume grew 1.5%, while global organic volume in beverages increased 3%, the highest quarterly rate in beverage volume growth that PepsiCo has experienced in the last three years.
Management is running a tight ship, PepsiCo has achieved $1 billion per year in annual productivity savings since 2012, and the company intends to sustain its productivity efforts over the years ahead. Gross profit margin increased by 130 basis points last quarter, while operating margin expanded by 165 basis points. This allowed PepsiCo to deliver a big increase of 11% in core constant currency earnings per share during the period, not bad at all coming from a market leader in a stable and mature industry.
The company has a pristine trajectory of dividend payments over the long term. PepsiCo has paid uninterrupted quarterly dividends since 1965, and it has accumulated 44 consecutive years of consistently growing dividends, including a 7% dividend hike for 2016. This shows that the business is strong enough to produce increasing cash flows through all kinds of scenarios.
The dividend yield stands at nearly 3%, and management is planning to allocate $7 billion to dividends and buybacks in 2016. This means that the total cash return -- dividends plus buybacks over market capitalization -- is approaching 4.8%. Considering that PepsiCo is a rock-solid cash generating machine, investors in the company are being well rewarded with sweet and healthy cash distributions.