In the cola wars, PepsiCo (PEP 0.44%) and Coca-Cola have a rivalry going back decades. PepsiCo is a much bigger company, with $81 billion in trailing 12-month revenue vs. Coke's $41 billion. That's because it also owns a host of food brands under its Frito-Lay snacks and Quaker Foods divisions. However, even its beverage segment is bigger than Coca-Cola's these days, at least domestically. In 2022's first quarter, PepsiCo's North American beverage segment produced $5.4 billion, while Coco-Cola's North American segment took in $3.6 billion.
In one area, though, Coca-Cola has outshined its peer for a while: It's been a Dividend King for the past 10 years. However, PepsiCo has just joined that exclusive club by raising its annual payout for its 50th consecutive year.
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The all-important dividend
Companies typically start to pay dividends when they're mature, their sales growth is slowing down, and they're bringing in lots of profits. The best dividend stocks are established, well-run companies that are still demonstrating growth. Dividend yields are usually, but not always, inversely correlated with growth. PepsiCo's dividend yields 2.65% at the current share price. Its stock is down 6.6% year to date, less than the S&P 500's 18% drop.
PepsiCo has been posting robust growth in recent years, and even though its sales dipped at the beginning of the pandemic, they bounced back relatively quickly, and have been going strong since. The strong performance in 2021 was more than a rebound, and inflation has so far worked in its favor as it has been successful at passing its increased costs on to customers.
| Metric | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|---|
| Sales growth | 1% | 2% | 4% | 5% | 13% |
Net income more than doubled in the 2022 first quarter, and while most of that jump was due to certain divestitures, Pepsi also benefited from an engaged community and investments in its core brands. It ended the quarter with nearly $1 billion in positive cash flow and $6.7 billion in cash and equivalents. It's this strong cash position that powers both the company's development and maintenance of its brand collection and operations, and its healthy and growing dividend.
Management has said it plans to pay $6.2 billion in dividends in 2022. In March, it announced a 7% hike to the dividend to be distributed in June. Over the past five years alone, payout raises have increased the total dividend by 43%.
PEP Dividend data by YCharts
What does it mean for the investor?
The Dividend Kings aren't a real club, and companies that make the list don't get a special award. But membership still confers a cachet of security and reliability on a company, and that's why it's a gold standard that means something to investors. Others that recently earned spots on the list include Target, AbbVie, and Kimberley-Clark.
PepsiCo is also planning $1.5 billion in share repurchases during its fiscal 2022. Reducing the number of outstanding shares can inflate the value of those that remain on the market.
PepsiCo has demonstrated that it's a formidable player under challenging circumstances, outdoing its rivals when times were tough and effectively passing its increased costs onto customers. Its wide product line gives it leverage, and its popular brands are sources of steady cash flows. And now, with its status as a Dividend King cemented, it's entering a new phase of life as an even more trusted income investment.
