A 3.5% dividend yield and a long track record of dividend increases have turned PepsiCo Inc. (NYSE:PEP) into a core holding for many income investors, but Pepsi isn't the only big company that's paying a market-beating dividend. In fact, other companies may offer investors a better blend of potential price appreciation and dividends than it does. To help you find those stocks, we asked three Motley Fool contributors to offer up companies they like more than Pepsi. Read on to find out why they think Pepsi lovers ought to consider TerraForm Power (NASDAQ:TERP), AstraZeneca (NYSE:AZN), and Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) instead.
An energy dividend worth betting on
Travis Hoium (TerraForm Power): Not all dividends are created equal and not all dividends are as reliable as the payout from TerraForm Power, one of the largest renewable energy asset owners in the world. The company owns 3,640 megawatts (MW) of wind and solar assets in the U.S., Spain, Uruguay, the U.K., and Chile, most of which have very long-term contracts to sell electricity to utilities.
According to management, 96% of TerraForm Power's cash flows are under long-term contract and the average contracted cash flow deal is 14 years in duration. This structure ensures that management and investors have visibility into cash flows that can be used to pay a dividend or buy growth assets.
What separates yieldcos in today's market is how aggressively they pay dividends and how flexible their finances are in allowing them to grow. TerraForm Power is solid on both fronts with management planning to pay out just 80% to 85% of cash available for distribution as a dividend, keeping 15% to 20% of cash flows to pay down debt or fund growth. They've also said there is a "clear path" to 5% to 8% dividend growth through 2022. For a stock with a dividend yield that's 6.8% today, that's a much better long-term payout than Pepsi can offer investors.
New drugs are overcoming headwinds
Todd Campbell (AstraZeneca): Patent expiration takes a toll on every biopharma stock from time to time, and AstraZeneca is no exception. Despite headwinds due to losing exclusivity on key products, AstraZeneca's financials are hanging tough because of growing demand for recently launched cancer drugs, and that could make buying shares while they're yielding 4.5% a smart move.
In the first six months of 2018, AstraZeneca's cancer drug sales accelerated 37% year over year, and as a result, they represent about 27% of companywide product revenue. The growth is largely due to Lynparza's ongoing growth in ovarian cancer and its recent launch in breast cancer. Rising use of Tagrisso in the second-line non-small cell lung cancer setting and Imfinzi in lung cancer are also behind the improvement.
A PARP-inhibitor, Lynparza's sales are increasing because it became the first drug in its class to win approval for use in breast cancer patients earlier this year. In the second quarter, Lynparza's sales jumped 147% year over year to $150 million. Meanwhile, Tagrisso's use in second-line lung cancer is increasing and its launch in the first-line setting is starting to pay off, too. In Q2, its sales jumped 77% to $422 million. Similarly, Imfinzi revenue doubled quarter over quarter to $122 million in Q2. If you combine sales growth for these drugs with sales growth from other recently launched drugs, new drugs have contributed more than $1 billion in additional sales during the first half of 2018 compared to one year ago.
Admittedly, investors shouldn't expect double-digit revenue growth from AstraZeneca, but I think it can deliver single-digit revenue growth, and if so, that should provide enough financial flexibility to support its healthy dividend payout. For the full year, management's forecasting low single-digit revenue growth and core earnings per share of at least $3.30.
A 5.4% dividend with room to grow
Maxx Chatsko (Royal Dutch Shell): There are numerous reasons that energy giant Royal Dutch Shell can find a home in any portfolio. It delivered $18.9 billion in operating cash flow in the first half of 2018, including $14.7 billion in free cash flow. It has completed or announced $30 billion in noncore asset sales to refocus on the most lucrative opportunities. It plans to use most of that to buyback $25 billion in shares.
More importantly for long-term investors, Royal Dutch Shell is taking a pragmatic approach to transitioning its business to cleaner energy technologies. It admits that carbon emissions are something that the world needs to take seriously, while also being realistic about how long the transition will take. So, although fossil fuel assets dominate the portfolio today, the energy giant will focus more heavily on cleaner-burning natural gas (important for reducing global coal consumption) and building a foundation for renewable electricity generation.
In early October, the company and a group of partners announced they would proceed with a $31 billion investment to bring a massive liquefied natural gas (LNG) export terminal online in western Canada. It will become the single-largest investment of private capital in the country's history and provide an important conduit for North American natural gas to reach energy-poor Asia, home to an overwhelming amount of global LNG consumption. By comparison, nearly all planned American LNG export facilities are located on the Gulf Coast, which lengthens the route to Asian markets.
Royal Dutch Shell expects the LNG business to experience significant earnings and cash flow growth in the next decade, which would provide ample opportunities to grow the dividend and continue growing its presence in electricity and gas utility infrastructure. Simply put, this oil major has an eye on the future -- and that will treat long-term investors very well.