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