Out of the thousands of dividend-paying companies in the world of investing, plenty like to say that they put their shareholders first. But there aren't nearly as many that do just that in practice.
The words and actions of one group of dividend-paying stocks known as Dividend Kings are well aligned. This is because there is no better way to demonstrate how much you value your shareholders than by rewarding them with at least 50 consecutive years of dividend growth.
PepsiCo (PEP -0.62%) is one of just four dozen stocks that can lay claim to being a Dividend King. But is the stock currently a buy for dividend growth investors? Let's jump into the beverage and snack giant's fundamentals and valuation to decide.
Brands that remain loved by consumers
There is arguably no consumer staple company that is both as dominant and well balanced as PepsiCo. The company's many billion-dollar brands are sold in just about every country and territory around the world. These include Aquafina bottled water, Doritos chips, and Mountain Dew soda.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Organic Revenue Growth Rate | 13% | 13% |
| Net Margin | 12.8% | 13% |
Data source: PepsiCo.
PepsiCo's revenue climbed by 10.4% year over year to $22.3 billion during its fiscal second quarter ended June 17.
To mitigate rising costs, the consumer staple upped its prices by about 15% from the year-ago period. And because PepsiCo's brands are consumed by more than a billion individuals each day, there wasn't as much pushback against these higher prices as you might expect. That's why organic volume declined by just 2.5% year over year for the quarter. Another headwind for the company was a 2.5% foreign currency drag that resulted from a strong U.S. dollar.
The consumer staple's non-GAAP (adjusted) core earnings per share (EPS) surged higher by 12.4% over the year-ago period to $2.09 in the fiscal second quarter. And when accounting for unfavorable foreign currency translation, constant currency diluted EPS grew by an impressive 15% for the quarter. Disciplined cost management helped to keep PepsiCo's expenses relatively in check, which is how core EPS grew at a faster clip than net revenue during the quarter.
As a result of the company's terrific brand portfolio and the pricing power that comes with it, analysts think PepsiCo's core EPS will compound by 7.8% annually for the next five years.
Image source: Getty Images.
Attractive payout growth can continue
Compared to the S&P 500 index's 1.5% dividend yield, PepsiCo's 2.7% yield is certainly capable of quenching the thirst of income investors. As a bonus, the company also offers solid dividend growth: PepsiCo's quarterly dividend per share has risen at an 8.3% compound annual growth rate over the past 10 years.
Data source: YCharts
PepsiCo's most recent 10% dividend increase suggests that dividend growth should also remain robust. This is because the company's dividend payout ratio is expected to come in at about 65% for the current fiscal year ending in December. That should give PepsiCo the ability to increase its dividend in line with profits over the next few years, which provides a nice pairing of income and growth prospects.
Investors probably won't regret buying the stock
As shown by its recent results and brand power, PepsiCo is clearly a winning business. And at the current price of about $185, the stock doesn't look to be that expensive, either.
PepsiCo's forward price-to-earnings (P/E) ratio of about 23 is almost in line with the non-alcoholic beverages industry average forward P/E ratio of 22.3. This is why I believe the stock is currently an interesting pick for dividend growth investors.
