Becoming a successful investor doesn't have to be difficult: Selecting companies with an established record of putting shareholders first is the key to success.
There's no better demonstration that a company values its shareholders than when it consistently hikes its dividend. Publicly traded businesses that have done so for at least 50 years are known as Dividend Kings.
Having just announced a 10% boost in its quarterly dividend per share to $1.265 (payable in June), few companies have rewarded shareholders as much as beverage giant PepsiCo (PEP 3.62%). But is the stock a buy for dividend growth investors? Let's assess PepsiCo's fundamentals and valuation to decide.
Tremendous brands are a major growth catalyst
With a $241 billion market capitalization and 291,000 employees around the world, PepsiCo is a truly dominant consumer staple. The company boasts a portfolio of more than 500 beverage and snacking brands, including the Aquafina bottled water brand, Doritos chips brand, and Quaker Oats snacks, cereal, and oats brand.
PepsiCo generated $28 billion in net revenue for the fourth quarter ended Dec. 31, which was a 10.9% year-over-year growth rate. How did the legendary company post such impressive top-line growth in the quarter?
The implementation of price hikes and a more favorable product mix led to a 16% increase in net revenue during the quarter. And since consumers have made PepsiCo's products a part of their daily life, there wasn't much pushback to these higher prices. This is why organic volume fell just 2% for the quarter, and how PepsiCo posted 15% (rounded) organic net revenue growth in the quarter.
As a result of the company's extensive international operations and a strong U.S. dollar, PepsiCo faced a 3% foreign currency translation headwind during the fourth quarter. PepsiCo's divestiture of its Tropicana and Naked juice brands led to a 4% decrease in net sales. This was partially offset by an additional week for the fourth quarter, which added 4% to the company's net revenue. These factors explain why PepsiCo's net revenue growth lagged its organic net revenue growth in the quarter.
The company recorded $1.67 in non-GAAP (core) diluted earnings per share (EPS) during the fourth quarter. For context, this was 9.2% higher over the year-ago period. Faster growth in selling, general, and administrative expenses (15.5%) than in net revenue resulted in a nearly 20 basis point contraction in non-GAAP net margin to 8.3% for the quarter. This was only somewhat neutralized by a 0.4% reduction in the company's diluted outstanding share count. That's why PepsiCo's core diluted EPS grew at a slower rate than net revenue in the quarter.
Thanks to its significant brand power, analysts believe that PepsiCo's core diluted EPS will compound at 7.6% annually over the next five years. Putting this into perspective, that's essentially in line with the non-alcoholic beverages industry average earnings growth forecast of 8%.
Dividend growth is showing no signs of slowing
Income investors can rely on PepsiCo's 2.6% dividend yield to satisfy their cravings for income. This is because that yield is materially higher than the S&P 500 index's 1.7% yield.
The cherry on top is that PepsiCo is no dividend growth slouch, either: The company's first-quarter dividend per share of $1.15 has soared 114% over the last 10 years, which equates to a 7.9% annual dividend growth rate. PepsiCo's 51st consecutive year of dividend growth and the accompanying 10% raise shows that dividend growth is accelerating rather than slowing.
PEP Dividend data by YCharts
This respectable dividend growth appears poised to continue as well. That's because in addition to high-single-digit annual earnings growth prospects, the company's dividend payout ratio is set to come in under 67% for 2023. That gives PepsiCo the needed funds to keep growing the business and repaying debt.
A world-class business at a sensible valuation
PepsiCo is a fundamentally exceptional business. This is why it shouldn't be surprising to learn that its stock has gained 6% over the last year while the broader markets have slid downward. Yet, the stock still looks to be a buy for dividend growth investors.
PepsiCo's forward price-to-earnings (P/E) ratio of 22.4 is just above the non-alcoholic beverages industry average forward P/E ratio of 22. PepsiCo's track record and fundamentals arguably justify this slight premium over its peers.
