Should income investors buy this unstoppable dividend king?


MCounting inflation has increased the risk that the United States will soon enter a recession. The median probability of a recession in the United States over the next 12 months has risen from 30% in June to 47.5% today, according to a recent Bloomberg survey of economists.

Growth oriented Nasdaq Compound fell 27% since the start of the year. But investors have flocked to sectors where demand is more predictable, such as consumer staples. This is largely why the king of dividends PepsiCo (NASDAQ: PEP) is down less than 1% since the start of the year.

But is the food and beverage business a buy for income investors right now? Let’s look at PepsiCo’s fundamentals and valuation to get an answer to this question.

PepsiCo rarely fails to impress Wall Street

PepsiCo did not disappoint earlier this month when it shared its financial results for the second quarter, which ended June 11. Net and adjusted income diluted earnings per share (EPS) both beat analyst consensus during the quarter.

PepsiCo posted net sales of $20.2 billion in the second quarter, a growth rate of 5.2% over the previous year. This amount was slightly higher than the $19.5 billion that analysts had expected for the quarter. How the megacap Company Exceeds Analyst Consensus on Net Revenues for 10th Consecutive Quarter?

Its portfolio of well-known brands such as Tostitos crisps, Tropicana juice and Muscle Milk is consumed more than a billion times a day by consumers around the world. And since PepsiCo is more oriented towards domestic consumption, its brands tend to resist recessions better. This is because when budgets are tight, consumers try to save money and therefore don’t frequent places like restaurants and theme parks as often.

PepsiCo’s portfolio of popular brands enabled it to pass on price increases to consumers in the second quarter. And due to the wide moat offered by these brands, consumers have not been phased by these higher prices. In fact, PepsiCo’s “convenience food” volume edged up 3%, while its beverage volume grew 6% in the quarter.

The company posted second-quarter basic EPS of $1.86, a year-over-year growth rate of 8.1%. PepsiCo had no trouble beating the analyst’s core EPS estimate of $1.73 in the second quarter. It was the 10th consecutive quarter in which the company has matched or exceeded analysts’ core EPS forecast.

A higher net revenue base and improved operating efficiencies allowed PepsiCo to adjust the net margin to climb 30 basis points from the period a year ago to 12.8% for the second quarter. This more than offset the 0.1% increase in the company’s weighted average number of shares outstanding to 1.4 billion.

Due to the brand strength of PepsiCo’s product portfolio, analysts expect similar earnings growth going forward. The company’s core EPS is expected to grow 7.9% annually over the next five years.

Image source: Getty Images.

Just the start of the dividend growth streak

PepsiCo’s 50 consecutive years of dividend growth gives it one of the longest track records among similarly sized stocks. Still, it looks like the company is just beginning to hand out passive income boosts to its shareholders.

The dividend distribution rate should be manageable at 67.8% in fiscal year 2022. This should allow the dividend to grow almost as fast as earnings for the foreseeable future, which is why I think a 7% annual dividend growth should be the norm. Considering that the stock’s 2.7% dividend yield is almost double the S&P500 1.6% of the index, this makes PepsiCo an attractive choice for current and future earnings.

Appraisal ain’t a bargain, but it’s fair

PepsiCo’s price-to-earnings (P/E) ratio of 25.9 could be moderately higher than its 10-year median P/E of 23.3. But the company’s fundamentals are arguably stronger than they have been in years. Indeed, the forecast of 7.9% annual earnings growth would represent a significant acceleration from the 5.3% annual earnings growth rate of the past five years. This is why the stock appears to be a buy at the current price of $172.

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Kody Kester has positions in PepsiCo Inc. The Motley Fool does not have positions in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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