Dividend Increase | Pepsico (PEP)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Pepsico for the dividend increase!
There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On February 13th Pepsico announced their 4Q earnings and their intention to increase the dividend to an annual rate of $4.09.  The dividend was increased from $0.955 up to $1.0225.  That's an excellent 7.1% increase.  Pepsico is a Dividend Champion with 48 consecutive years of dividend increases. Shares currently yield 2.78% based on the new annualized payout.

Since I own 67.364 shares of Pepsi in my FI Portfolio, this raise increased my forward 12-month dividends by $18.19.  This is the 7th dividend increase I've received from Pepsi since initiating a position in December 2013.  The total organic dividend growth over that time comes to 80.2%.



A full screen version of this chart can be found here.

Pepsico's dividend history is one of the richest out there and nearly half a century of raises certainly doesn't disappoint.

Of the 48 1-year periods during Pepsi's dividend growth streak, year over year raises have ranged from 2.5% to 52.1% with an average of 12.9% and a median of 11.3%.

Of the 44 rolling 5-year periods, annualized dividend growth has ranged from 4.0% to 27.0% with an average of 12.2% and a median of 11.3%.

Of the 39 rolling 10-year periods, annualized dividend growth has ranged from 7.5% to 20.3% with an average of 11.8% and a median of 11.3%.

The 1-, 3- and 5-year rolling dividend growth rates since 1973 can be found in the following chart.  




A full screen version of this chart can be found here.

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 5 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.


A full screen version of this chart can be found here.

Pepsi's 5-year average forward dividend yield is 2.93% which corresponds to a share price of $140 based on the new annualized payout.  

I consider the fair value range based on dividend yield theory to be the 5-year moving average yield +/- 10%.  That gives a fair value range of $127 - $155 and suggests that shares of Pepsi are trading on the upper end of fair value at the moment.

Using a multiple analysis, shares of Pepsi seem on the expensive side as well.  Based on FY 2020's estimates of $5.93 EPS and FY 2021's estimate of $6.39, shares of Pepsi are trading at 24.8x and 23.0x, respectively.  Pepsi is also currently trading at a 18.5x EV/EBITDA multiple.

A quick estimate of the future returns that Pepsi will generate can be taken by adding the current dividend yield to the earnings growth rate and then adjusting for the likely change in multiple.  That gives a return estimate of 2.78% plus 3.85% or just 6.6% before accounting for valuation changes.


  




Wrap Up

This raise increased my forward dividends by $18.19 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my FI Portfolio's current yield of 2.84% this raise is like I invested an extra $640 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way.  

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

I've now received 10 raises from 10 of the 54 companies in my FI Portfolio increasing my forward-12 month dividends by $87.51.

My FI Portfolio's forward-12 month dividends are $8,013.84.  Including my FolioFirst portfolio's forward dividends of $101.45 brings my total taxable accounts dividends to $8,115.29.  My Roth IRA's forward 12-month dividends are $657.85.  My Rollover IRA's forward dividends are $2,395.36.  Across all accounts I can expect to receive $11,168.50 in dividends over the next year.

If you happened to catch that this raise marked a milestone for our main FI Portfolio.  Our forward 12-month dividends crossed over $8,000 for the first time ever which I'm pretty stoked about.  The next milestone is going to be $9,000, but given some likely/possible changes it might be awhile before we cross that mark.

I've also started compiling dividend data on many of the companies that I own or would like to own.  Pepsi's can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Do you own shares of Pepsico?  What do you think of Pepsi's current valuation?

Please share your thoughts below.

Comments

  1. PiP -

    HELL YES. Love this article and I didn't even realize they announced this. Thank YOU for sharing, this added $10+ to my forward income.

    -Lanny

    ReplyDelete
    Replies
    1. Lanny,

      Yeah, PEP is weird how they announce the increase with their 4Q results but it skips the next payment. Either way I'm happy to see another solid raise from them.

      Delete
  2. Hi JC. This year's 7% raise take most of the sting out of last year's 3% raise. Given that PEP is a top 10 holding for me it bumped my forward dividend income by $28.71... so I was obviously stoked about that.
    I seem to be off to a better start this year with respect to dividend raises when compared to last year. Does the same seem true for you?

    ReplyDelete
    Replies
    1. ED,

      Got to love getting an extra $30 from a business while doing nothing. Dividend growth for me has been very hit or miss so far in 2020. The average raise from the 11 companies that I own that have announced raises so far comes to 4.5%, but CVX, PEP and APD were all really strong. CSCO and AFL are the 2 that I was the most disappointed by because I expected a little bit stronger raise.

      I still have 3 more raises that are likely to be announced before the end of the month with DLR, BNS and TD so February was definitely a solid month with the number of raises. If all 3 of them announce this month that'll put the total at 11 increases in February alone and 15 total through the first 2 months of the year.

      Delete
  3. I really like PEP. There diversification into salty and sweet snacks really gives them an edge of KO.

    ReplyDelete
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