Unlike earnings, which can be engineered by management with accounting tricks and assumptions, dividends are paid in cash. They provide a clear and transparent measure of the strength of a business. PepsiCo (NYSE:PEP) recently announced its 43rd consecutive year of growing dividends, showing that the soda and snack giant is one of the most solid, reliable dividend stocks on the market. Read on to learn more about the latest dividend announcement and what it means for investors looking forward.
It takes a particularly strong business to generate growing cash flows and dividends over several decades, successfully maneuvering through economic downturns and changing industry trends. PepsiCo benefits from sustainable competitive advantages thanks to things like brand power, scale, and financial resources.
PepsiCo is the second biggest player behind Coca-Cola (NYSE:KO) in the soft drinks industry. However, the company is the undisputed global leader in snacks. Across its global portfolio, PepsiCo owns a total of 22 brands, each bringing in over $1 billion in retail sales, surpassing Coca-Cola and its 20 billion-dollar brands. This massive presence in both food categories has important advantages for the company in terms of diversification and competitive strategy.
Consumers around the world are reducing soda consumption due to the negative health implications of sugar and artificial sweeteners. This is a major headwind for the entire industry, but PepsiCo is able to buffer the declining soda sales with its strength in snacks. Based on data for 2014, Pepsico generates approximately 38% of sales and 53% of operating profits from the snacks and foods business. The company has also smartly expanded into healthier non-carbonated drinks with successful brands such as Gatorade and Tropicana over the last several years.
Also, its massive presence in snacks and drinks allows PepsiCo to promote both product categories together. The company has identified which drinks and snacks consumers find complementary, and it is using that information to increase marketing effectiveness.
PepsiCo has recently launched its largest ever global campaign for its two biggest brands, Pepsi and Lays, with coordinated package graphics, use of sports and entertainment properties, point of sale material, ad copy, and promotions. This campaign is heavily focused on international markets, while PepsiCo is also promoting Doritos and Mountain View together in the U.S. Health-conscious consumers can find a more suitable pair in the combination of Quaker Oats snacks with Tropicana drinks.
Based on data from Market Track, PepsiCo "bundle" ads jumped 202% during January in anticipation of the Super Bowl.
Coca-Cola is the only industry player with comparable scale and global presence. Fortunately for investors in both companies, Coca-Cola and PepsiCo are quite friendly when it comes to price competition -- the two companies are relying on smaller packaging to realize higher prices and better adapt to changing consumer habits, so pricing competition remains under control.
Turning fundamentals into growing cash flows
During 2014, PepsiCo raised dividends for the 42nd consecutive year, and the company returned $8.7 billion in total to shareholders via dividends and share repurchases. This represents a significant increase of 36% versus total capital distributed to shareholders in 2013.
The company produced $10.5 billion in operating cash flows last year, while capital expenditures absorbed nearly $2.8 billion. This means PepsiCo generated approximately $7.7 billion in free cash flow. Its financial strength is not in question, but buybacks will most likely increase at a more moderate rate in the coming years in order to avoid excess debt.
For 2015, PepsiCo is increasing dividends per share by over 7%, bringing the annual payment to $2.81. The dividend yield is in the neighborhood of 2.9%, in line with Coca-Cola and especially attractive coming from a rock-solid company in times of historically low interest rates.
In addition, management plans to distribute between $4.5 billion and $5 billion to investors via share repurchases during the year, bringing total cash distributions to between $8.5 billion and $9 billion. By the end of 2015, PepsiCo will have distributed nearly $65 billion to investors over a decade.
This spectacular track record of cash distribution says a lot about the health of the company. While share repurchases will most likely fluctuate year-over-year in accordance with business performance over a particular period, the company has a lot of room to continue raising dividends over the long-term. The latest dividend hike form PepsiCo will most certainly not be the last.
Andrés Cardenal has no position in any stocks mentioned. Andrés will neither confirm nor deny having eaten a whole bag of Lays before dinner. Andrés will admit that he was feeling quite thirsty, though. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.