This article is part of our weeklong series on 11 incredible dividend stocks. You can get the low-down on this series by clicking here.
Everyone likes a grudge match. Whether it's PC versus Mac, iPhone versus BlackBerry, or Big Macs versus Whoppers, people feel very strongly about their favorite products, inspiring them not just to love their choice, but to outright hate the alternative.
But investing isn't about emotion, so I decided to get past my love of the red-canned Atlanta giant to take a look at one of the most incredible dividend stocks ever: PepsiCo (NYSE: PEP).
The business
As half of one of the biggest corporate rivalries in history, PepsiCo's soft-drink business needs no introduction. From taking the Pepsi Challenge to doing the Dew, PepsiCo's beverages have gone up against the best Coca-Cola (NYSE: KO) has to offer for decades.
What may surprise you, though, is that PepsiCo's other businesses are just as important to its overall success. Its Frito-Lay segment makes snack foods like Rold Gold pretzels and Ruffles Potato Chips, going head-to-head against snack rivals Kraft Foods (NYSE: KFT) and ConAgra (NYSE: CAG), as well as smaller players like Snyder's-Lance (Nasdaq: LNCE). All told, PepsiCo's food businesses pull in almost as much revenue and quite a bit more in operating profits than its legacy beverage business.
| Company | PepsiCo |
| Dividend Yield | 3% |
| 5-Year Dividend Growth Rate | 13% |
| Payout Ratio | 50.3% |
| Has Paid Dividend Without Interruption Since | 1965 |
| Streak of Consecutive Annual Dividend Increases | 39 years |
Why it's incredible
In many businesses, being perceived as No. 2 is the kiss of death. As Coke's smaller rival, PepsiCo has always had to fight to prove itself as a legitimate challenger. Even with a 30-year average annual return of more than 15%, which has turned every dollar invested in 1981 into $73 today, some investors still see it as the also-ran of the industry.
Yet PepsiCo hasn't let that perception stop it from making ambitious strides toward growth. In recent years, despite Coke's international strength, PepsiCo has pushed strongly into emerging markets. In particular, PepsiCo has made big investments to ensure its place in the global marketplace, with one example being last year's pledge to spend $2.5 billion in China over three years.
Potentially even more revolutionary, though, is the company's commitment to healthy eating. You might think that encouraging healthier habits would be a bad move for a company whose legacy products have come under fire for contributing to health problems, but PepsiCo is doing it with products like sports drink Gatorade, lower-calorie fruit juices, and a variety of snack foods with less sodium, healthier oils, and more whole grain and fiber. In other words, PepsiCo realizes that rather than hanging onto a legacy business for as long as it can, even as surrounding trends change, adapting to changing conditions and leading the next wave of progress can be even more lucrative -- and can ensure its continuing place among the strongest players in the global economy.
Dividend strength
PepsiCo is part of the S&P 500's Dividend Aristocrats index, whose members have all paid and raised their dividends annually for at least the past 25 years. PepsiCo even stands out among that rarefied crowd.
Consider: All it takes for a company to keep a long dividend streak alive is to make a token dividend increase once a year. Shareholders don't necessarily reap big rewards just because their stock makes the Dividend Aristocrat list.
But PepsiCo has no problems on that front. The company has raised dividends at a healthy clip lately, with its most recent payout just short of doubling its level in early 2006. Moreover, contrary to the trend among big companies to pay less of their earnings in dividends, PepsiCo's payout ratio has risen steadily over the past several years, from around 30% in 2003 to more than 50% in the past 12 months. Yet that still leaves almost half of PepsiCo's profits available for expansion, share buybacks, and other corporate purposes -- and shows that the company has a healthy buffer against hard times without worrying about a potential dividend cut.
Risks
Like Coke, Dr Pepper Snapple (NYSE: DPS), and Hansen Natural (Nasdaq: HANS), PepsiCo is vulnerable to changing trends in the beverage industry. Yet with its snack business, PepsiCo benefits from the diversification that its drink competitors lack.
Of course, the snack business introduces its own risks. Rising raw food prices threaten to raise input costs and squeeze margins. And although fast growth in emerging countries like China and India has bolstered profits, possible slowdown in overseas growth could hurt PepsiCo's bottom line.
One other concern is PepsiCo's significant long-term debt. Right now, the company's debt-to-equity ratio rests at 115%. With operating earnings exceeding interest expense by more than a factor of 10, PepsiCo doesn't have any trouble maintaining its debt. But when interest rates rise, the company may face having to refinance that debt at higher rates, potentially eating into profits and pushing its payout ratio higher.
In sum
Whatever you have in your refrigerator, dividend investors should strongly consider adding PepsiCo to their stock portfolios. Despite the risks, the company has put together a long history of delivering results to shareholders. That's the most refreshing thing investors could ever ask for.
If you want more ideas on strong dividend stocks, be sure to check out these 13 high-yielding dividend stocks. Click on the link and learn everything you need to know.
Be sure to stay tuned to Fool.com as we continue our 11 incredible dividend stock series for the rest of the week.
