In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal, but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is PepsiCo (NYSE: PEP), which posts a 3% dividend yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share 13%

Source: PepsiCo investor relations.

There's no question that PepsiCo has a very good dividend track record -- it's been paying dividends since 1952 and has raised its payout for 38 consecutive years.

Moreover, the dividend growth rate over the past five years was above 10%, so it scores a perfect 5 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage 10.5 times 10% 5
EPS payout ratio 47.1% 10% 5
FCFE payout ratio 98.7% 30% 2

Source: Capital IQ, a division of Standard & Poor's, as of March 21.

PepsiCo has a very strong balance sheet and it covers each $1 in interest expense with $10.50 in operating earnings. Morningstar gives PepsiCo a very respectable "AA-" credit rating.

The dividend has also been consistently covered by earnings and free cash; however, free cash flow cover was rather slim in 2010 due to larger-than-normal acquisition activity. That's not necessarily cause for alarm, but PepsiCo investors will want to keep an eye on the size of future acquisitions and the effects on free cash.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio 47.1% 10% 4
FCFE payout ratio 98.7% 20% 2
Sustainable growth rate 17.2% 10% 5

PepsiCo spends a lot of its free cash repurchasing shares -- in 2010, for instance, it repurchased nearly $5 billion worth of its stock and paid about $3 billion in dividends. Because buybacks are less "sticky" than dividends, PepsiCo conceivably has plenty of room to reduce buybacks and increase dividends over time.

Analysts expect long-term earnings growth to be around 10%, but I would expect PepsiCo's dividend to fall closer to 6%-8% annualized growth over the next five years. This expectation is primarily due to PepsiCo's relatively modest 7.8% increase in 2009 and 6.5% increase in 2010.

Competitors
An "ungraded" section of the dividend report card compares a stock's current yield against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or cut the payout, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

Coca-Cola (NYSE: KO) 3.0% 9.9%
Dr Pepper Snapple Group (NYSE: DPS) 2.6% 10.0%
Kraft Foods (NYSE: KFT) 3.7% 10.0%

With its current yield at 3%, PepsiCo's dividend yield is right in line with this peer group and basically toe-to-toe with Coca Cola – a great rivalry in more ways than one!

Pencils down!
With all the numbers in, here's how PepsiCo's dividend scored:

Weighting

Category

Final Grade

10%

History

5

  Sustainability  

10%

Interest Coverage

5

10%

EPS Payout Ratio

5

30%

FCFE Payout Ratio

2

  Growth  

10%

EPS Payout Ratio

4

20%

FCFE Payout Ratio

2

10%

Sustainable growth

5

100%

Total Score (out of 5)

3.4

  Final Grade

B-

PepsiCo has been a tremendous dividend payer over the years and rarely has it traded for a yield over 2.5% over the past decade. That could be revealing of a switch in the market's expectations for future growth, or it could be the sign of a good buying opportunity.

Have you added PepsiCo to your Watchlist yet? Well what are you waiting for? Click here to make it happen.

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He does not own shares of any company mentioned in this article. Coca-Cola is a Motley Fool Inside Value recommendation. Coca-Cola and PepsiCo are Motley Fool Income Investor picks. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola, and PepsiCo, and has a disclosure policy.