International beverage and snack giant PepsiCo (PEP +0.64%) announced it would be raising its dividend by 5%. The company has long been a Dividend Aristocrat, a term designated for companies that have paid and increased their dividend for at least 25 years.
In fact, PepsiCo's increase in 2022 put it in a position to earn the Dividend King designation reserved for companies that have paid and increased their dividend for 50 consecutive years. This is a feat so rare that only 31 companies held the status in 2021. For retirees who depend on dividend income, stocks with the Dividend King status offer an extra degree of reliability.
PepsiCo is on its way to becoming a Dividend King in 2022. Image source: Getty Images.
PepsiCo is raising its dividend once again
PepsiCo will be increasing its quarterly dividend per share to $1.075, payable on March 31, 2022, for shareholders as of March 4, 2022. That will be a 5% increase from the dividend in the same period a year ago and consistent with PepsiCo's announcement that it will increase its annual dividend to $4.30 from $4.09. Since the pandemic's onset, the company has thrived as billions of folks spend more time at home where they have more opportunities to reach for snacks and beverages.
The dividend increase is part of a long trend. Between 2011 and 2020, PepsiCo investors saw their dividends per share nearly double from from $2.03 to $4.02. Those gains came despite PepsiCo's difficulty in growing earnings, which expanded at a compound rate of just 2.7% in that same time. As a result, PepsiCo's dividend payout ratio increased over the years to reach 70.5% most recently. While on the high side, it is still manageable.
A dividend payout ratio above 100% is unsustainable as that means a company is paying more in dividends than it is earning in net profits. In that case, the excess over 100% is coming from either savings or borrowing, which are unsustainable sources in the long run. That said, existing shareholders should expect only a modest dividend increase in the near term from PepsiCo until or if it can unlock more robust earnings growth.
Still, PepsiCo's stock pays a healthy dividend yield of 2.46%. Combined with gains in the stock price, it has delivered respectable shareholder returns. Interestingly, after struggling to grow revenue for the first half of the decade, PepsiCo accelerated growth in the past four years. In 2017, 2018, 2019, and 2020, PepsiCo increased revenue by 1.2%, 1.8%, 3.9%, and 4.8%, respectively. If it can sustain the momentum for the next several years, it could give earnings a boost and further fuel increases in dividends to shareholders.
What this could mean for PepsiCo stock
Reaching the 50-year milestone may give PepsiCo stock a home among income-seeking investors who prefer Dividend Kings. The status is proof that the company can sustain and grow dividend payments through good times and bad as a company will have encountered a myriad of challenges over that period. The most discerning dividend investors can place PepsiCo on their list of income stocks to consider.
