Well, it looks like I had an itch that needed to be scratched after compiling my May dividend stock watch list. After years of coveting this stock and patiently waiting on the sidelines for the right moment to strike, the purchase date finally arrived. After all, how could I pass up the opportunity to purchase one of my “Always Buy” stocks? Time to see why I finally initiated a position in Pepsico (PEP) in May!
Why PEpsi?
I already mentioned that this is one of those companies that is considered one of my “Always Buy” companies. So I already have a high opinion of the company. But there have always been a few things that jumped out about PEP that have caused me to hold the company in such high regard. First, I love the fact that the company is diversified. PEP is not just a beverage or a snack food business. The company owns some of the most iconic brands in each respective sector. For beverages, PEP owns names such as Pepsi, Mountain Dew, Naked, and Gatorade. For snack foods, PEP owns brands such as Fritos, Lays, Quaker Oats, Sun Chips, Doritos, and Cheetos. Of course there are others, but clearly you can see those are some powerful names in their respective sectors that can be found in a ton of households.
What I like about the diversification between sectors is that it protects against a slump in one respective area. For example, in the company’s last earnings release. This quarter was not the strongest for the company’s North American beverage business, which saw sales decrease by 1% and operating profit decrease by 23%. However, the company had sales and profit growth in their snack business (particularly in North America) to offset this. Overall, the company realized sales growth of 4% and a slight decrease in their operating profit during the quarter (3%). While the results could have been better, the diversification and brand presence in two sectors allowed the company to withstand a poor performance in one sector.
Dividend Diplomats stock screener – PEP edition
But the brand’s allure was not the only reason I purchased PEP. Finally, after years of trading at a premium, PEP’s price has receded and the company performed very well in our Dividend Stock Screener. For the screener, we will use an EPS figure of $5.71/share (average analyst EPS for the fiscal year) and a price of $100.50 (about the price at the time I decided to purchase shares). The detailed results of the screener are as follows:
Metric #1: Price to Earnings Ratio – We typically look for the company’s P/E ratio to be below the broader market, which has a P/E ratio in the low-to-mid 20X figure. Using the figures above, PEP’s P/E ratio was 17.6X. PEP passes this metric.
Metric #2: Payout Ratio less than 60% – The company’s forward annual dividend payout (see more in the next metric) is $3.71/share. This equates to a payout ratio of 64.9%. This is slightly above our threshold; however, not by an amount that is causing me to lose sleep. I would be more concerned if PEP’s payout ratio was closer to 80% or higher. Plus, the company announced a rather large dividend increase. This leaves me pretty confident that the payout ratio is not out of hand in the eyes of management. I’ll say that PEP passes this metric as well.
Metric #3: History of Increasing their Dividend – Let me start by grabbing the low hanging fruit here. PEP is a Dividend Aristocrat after all, which demonstrates in itself that the company has a history of increasing their dividend over the long-term. I’ll give PEP a pass just for this. But the fun doesn’t stop there. In February, PEP announced a fantastic dividend increase and buyback program. The company increased their annual dividend to $3.71/shares (starting in June) and a $15b share buyback program to be completed over the next 3 years. Wow, now that is some serious capital being returned to the shareholders!
The Stock Purchase – PEP
So finally, on to the purchase details now that we know PEP passes our stock screener. I set up an automatic trade purchase with Capital One on Monday, which allowed me to purchase shares for a fixed amount (including fractional shares) for $3.95 per trade. Man am I going to miss this platform! Unlike my Realty Income purchases, the price of the stock finally decreased on the date of my purchase.
I added 40.4009 shares of PEP at a trade price of $99.009/share. I was so excited that I was able to make the purchase when the share price was below $100/share. In total, I added $149.89 in forward dividend income to my portfolio. The best part is that I am still going to receive my first dividend in June, so the impact will be felt this quarter. Man I cannot wait to receive this dividend in June!
What are your thoughts about my purchase? Do you like PEP at the current prices? What other companies are on your current watch list?
-Bert
Pepsi is definitely attractive at this price. Might buy some. Thanks for the analysis Bert.
Agree about the valuation! It is a great opportunity right now, that’s for sure. Let us know if you end up buying Geek!
Bert
Taking advantage of PEP here and adding to my position.
Boom! Nice job adding as well.
Bert
Great buy! I also made a small purchase of 5 shares @ $97 and initiated a position in this new stock for my portfolio.
Keep up the great work Bert!
Thanks Mr. Robot! Congrats on the purchase as well and starting a new position. It is always exciting when you can add a new company to your portfolio.
Bert
Great buy Bert,
Good analyze from the company,
Unfortunatly I don ,t have enough cash to buy them, hopefully the price will stay at the same level for 2 weeks to add a few shares.
Thanks Willem! I’ll keep my fingers crossed for you that the price will remain the same for the next two weeks. In fact, I’ll even ask that the price decreases for you 🙂 Who knows, I may add some more if the price continues to decline.
Cheers,
Bert
I like PEP and hold a moderate size position. Loved the recent double digit dividend increase announcement and would love to add a little more especially at 4% forward yield or better if it gets there. I also own KO, but like the diversity PEP’s snack business gives them. Tom
Tom,
Thanks for the comment. It would be insane if their yield hits 4% and I would probably have to add a little more as well. The double digit increase was SWEET and has me pretty darn excited about the company’s prospects going forward.
Bert
Nice recap, Bert – thanks for sharing. A good purchase based on the criteria you outlined for your portfolio.
And agreed – that dividend in June will be nice! – Mike
Mike – Thank you very much for the kind words/support. Let’s enjoy this sucker in June!!
Bert
Nice buy Bert! I’m watching several consumer staples at the moment so there’s a chance I’ll end up buying some PEP too.
PIG,
Thank you very much. What other consumer stocks are on your watch list? Do you have any slotted ahead of PEP?
Bert
Quite a few dividend investors jumped all over PEP went it broke below $100, including myself. Luckily we had some money on the sidelines to grab some shares ???? congrats on starting a nice position
Ken,
Yes they have! It was that magic dip below $100/share that has investors very excited. Heck, can you really blame them though?? I’m glad you made a move, turned that sideline capital into an income producing asset. Congrats on the purchase yourself 🙂
Bert
Great buy!
Among quite a few cheap consumer goods companies, I believe PEP is a very good buy.
It´s beautiful that the price finally dropped after you´ve whatched PEP for a long time. I´m impressed with such cold blooded stock hunters.
Cheers!
/GI
GI,
I’ve been called many things in my lifetime, but cold-blooded has never been one of them! I appreciate that. You’re right, it has been a treat seeing the price fall into a purchase zone after all of these years.
Cheers,
Bert
Nice bert love the company and their huge dividend boost this yr. Great buy! And adds a tonne of income to future dividends.
Keep it up
Cheers
Thanks PCI! I can’t wait till I get that first dividend check in June, that’s for sure.
Bert
Great Buy Bert! I bought 18 shares of PEP last month! And I find myself wanting more lol. 🙂
MDD,
Thanks! I’m glad you also purchased shares as well 🙂 I’m with you, much like pop (soda for you non-Ohioans), you always want to go back for more. That’s why I avoid it altogether.
Bert
Love the addition, Bert. I added 14 shares myself recently. I’ve held PEP for over 20 years and love the steady returns it provides. That was a nice chunk of new forward dividend income you got. Way to bolster the portfolio!
Thanks ED! I appreciate the kind words. I’m glad that so many other bloggers are hopping on the PEP train as well. I hope that I can one day celebrate my 20 year PEP anniversary like you 🙂
Bert
Wow, what a purchase! Such a great stock and then 40 shares, very well done!
DI
DI,
Thank you very much. I can’t wait to receive that first dividend check in June, that’s for freaking sure. It is nice to initiate a large position and immediately be comfortable with the overall position.
Bert
Bert,
PEP is a solid company, one that I want to own more of for sure.
– Gremlin
Thanks Gremlin. Are you thinking of making a purchase here soon?
Bert
Great buy. I have KO in my portfolio now but wouldn’t mind owning its rival as well. Both solid companies. PEP is on my watch list. So much value in the market right now. Happy to see you taking advantage of the opportunities.
Daze,
I don’t think it could hurt to own both, right? In fact, I don’t think you could ever go wrong having multiple dividend aristocrats in the same industry. Agree, there is a done of great value out there for investors to have and there are plenty of other opportunities I want to take advantage of.
Bert
Like the buy a lot. PEP was one of the very first DGI stocks in my portfolio waaaaaay back. Now that price, value and yield look compelling it is one of my potential May buys. This is a long term keeper in my opinion. Happy to have you on board the PEP train!
Thanks Divhut. That is a trip down memory lane right there. Are you planning on adding more, especially as the price continues to fall here?
Bert
Great purchase here Bert. I have a position in KO and haven’t given much thought to PEP in the past. With the PEP price this cheap I am considering starting a position. Thanks for sharing.
Thanks More Dividends! Let us know if you decide to initiate a position in PEP as well.
Hey,
I bought it as well last week, 18 shares in the pocket! However, i intent to keep it a small position because last 5 years had hardly EPS and CashFlow growth. I know that there’s higher guidance now, but i couldn’t find a clear catalyst for it, other than a lower tax rate. What were your findings on this matter? It’s important for me to see Earnings & Cashflow growth potential, because that’ll ensure dividend growth going forward. They also have a high debt level, so i just wonder what your dividend growth projections are?