Once a carbonated beverage is opened, it loses its fizz after a few days and a bit of its taste in the process. Unlike its billion-dollar Sierra Mist and Pepsi beverages, PepsiCo (PEP -0.08%) is showing no sign of losing its "fizz" or momentum as a company.
But does that make the stock a buy for dividend growth investors at this time? Let's dig into PepsiCo's operating results, balance sheet, and valuation to decide.
Third-quarter results were far from flat
Starting with net revenue, PepsiCo grew 11.6% year over year to $20.2 billion in the third quarter. It's worth noting that PepsiCo's reported revenue exceeded analysts' third-quarter estimates of $19.4 billion by 4%.
PepsiCo's robust top-line growth was driven by increased volumes in both its food/snack and beverage businesses. To this point, PepsiCo's food/snack volumes rose 4% in the third quarter while its beverage volumes advanced 8%.
The other component that propelled PepsiCo's net revenue upward was the price increases that CFO Hugh Johnston said partially occurred in the summer during PepsiCo's Q3 2021 earnings call. And with the company expecting to pass on more commodities inflation to consumers later this year in the beverage and snack-food businesses, it has the pricing power to keep revenue moving higher.
Moving to the bottom line, PepsiCo's non-GAAP EPS climbed 7.8% year over year to $1.79 in the third quarter. This topped analysts' predictions of $1.73 in non-GAAP EPS for the third quarter by 3.5%.
Due to its better than expected third quarter, PepsiCo raised its full-year organic revenue outlook from the previous forecast of 6% growth to 8% for this year. Unlike net revenue, organic revenue accounts for the effect of foreign currency translation, as well as acquisitions and divestitures. Given that PepsiCo has delivered 8% organic revenue growth in the first three quarters of this year, this seems like a forecast based in reality.
PepsiCo also raised its full-year non-GAAP EPS growth outlook from the previous forecast of 11% to at least 11% for this year. This would represent an advance from $5.52 in non-GAAP EPS last year to at least $6.20 in non-GAAP EPS this year.
A solid balance sheet
PepsiCo's growth forecast for this year looks healthy. But can the same thing be said about its balance sheet? Let's take a look at PepsiCo's net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) and interest coverage ratio to find out.
PepsiCo's net debt as of the end of the third quarter was $30.5 billion, which is calculated as $37 billion in long-term debt less $6.5 billion in cash. When annualizing the $10.8 billion in EBITDA that PepsiCo generated in the first nine months of this year, this works out to $14.4 billion in EBITDA. Thus, PepsiCo's net debt to EBITDA ratio is 2.1, which means that it could cover all of its net debt with EBITDA in just over two years.
The interest coverage ratio is a useful measure to gauge a stock's solvency. The interest coverage ratio is calculated as EBIT divided by interest expenses.
PepsiCo's interest coverage ratio improved from 9.5 in the first nine months of last year ($7.50 billion in EBIT/$789 million in interest costs) to 12.3 in the first nine months of this year ($8.96 billion in EBIT/$731 million in interest expenses). PepsiCo can easily cover its interest expenses with EBIT, which means it should remain in business for the foreseeable future.
A fairly valued blue-chip stock
PepsiCo is the very definition of a blue-chip stock, which is evidenced by the fact that it has raised its dividend for 49 consecutive years. This comfortably places it among five dozen other S&P 500 stocks that have raised their dividends for at least 25 years, which makes PepsiCo a Dividend Aristocrat. With a dividend increase likely set for next year, PepsiCo is also on the verge of becoming a Dividend King.
Since analysts expect PepsiCo will generate $6.34 in non-GAAP EPS over the next four quarters and the current share price is $160, PepsiCo's forward price-to-earnings (P/E) ratio is 25.3. This is somewhat higher than the S&P 500's forward P/E ratio of 21.3, but I believe this premium is deserved given PepsiCo's quality.
PepsiCo offers investors a market-beating 2.7% yield, which is positioned to grow in line with the high-single-digit annual earnings growth that analysts are forecasting over the next five years.