It's comforting for investors to receive regular dividends. Payouts can provide a source of income that appeals to a variety of investors. But it's important to look beyond a stock's dividend yield. That's because a high yield may have been caused by a stock price drop due to a company running into difficulties, and the board of directors may cut the payout.
PepsiCo (PEP -0.14%) and Procter & Gamble (PG -0.13%) have increased dividends annually for more than half a century. This impressive feat makes them Dividend Kings. While this shows that they prioritize dividends, do they have the wherewithal to continue doing so? It's time to analyze each business to make that determination.
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1. PepsiCo
PepsiCo sells a wide swath of popular foods, snacks, and beverages known to most consumers. These include names like Doritos, Quaker, Pepsi, and Gatorade, which not only have strong brand recognition, but also continue to generate profit growth.
After adjusting for certain items, such as foreign exchange translations, earnings per share grew 14% last year. This, in turn, has led to solid free-cash-flow (FCF) generation. PepsiCo's FCF was $7.9 billion last year, and it paid $6.7 billion in dividends.
More importantly, the board of directors signaled confidence in PepsiCo's prospects when it announced a 7% dividend increase earlier this year to an annualized $5.42. That made it 52 straight years that the board has increased payments. The stock's 3% dividend yield is more than double the S&P 500's 1.4%.
PepsiCo's stock price has lost over 8% in the past year in contrast to the S&P 500's nearly 27% gain. While revenue has grown, product volumes have dropped. As inflationary pressures have dropped, higher volumes should return over time, however.
2. Procter & Gamble
There's a good chance you've shopped for Procter & Gamble products and have them somewhere in your home. That's because it sells everyday items like shampoo, razors, toothpaste, laundry detergent, and diapers under brands like Head & Shoulders, Gillette, Crest, Tide, and Pampers. It has a high-market share in several product categories.
Fortunately, these products have stable demand throughout the economic cycle. That's allowed Procter & Gamble to pay dividends for 133 years and increase them for the last 67 years. There aren't many companies that can make that claim.
It has a 62% payout ratio. While that may seem high, it's perfectly acceptable given the company's stable business. The ratio has hovered around the 60% range for the past three years. The stock's 2.4% dividend yield is 1 percentage point higher than the S&P 500's yield.
Adjusted sales for the fiscal second quarter (ended Dec. 31, 2023) grew 4%, but earnings increased 16%. Certainly, you can find faster-growing companies, but for dividend-seeking investors, this mature business continues to generate plenty of FCF. During the first half of the year, Procter & Gamble's FCF totaled $8.3 billion, which was more than plenty to pay the $1.7 billion in dividends.
PepsiCo and Procter & Gamble may not be the flashiest stocks. But I think you'll find these reliable cash-flow generators, which continue to increase dividends every year, very satisfying to own.
