Pepsico (Pepsi) Stock Analysis

Pepsico’s (“Pepsi”) large brand portfolio can be found can be found in almost all grocery stores, convenience stores, stadiums, homes, etc.  You get the picture.  This brand is iconic.  What else is great about Pepsi?  It is a strong dividend growth stock with a long history of  paying a dividend.  While it is not quite an Aristocrat,  Pepsi can be found in many dividend growth investors’ portfolios (including Lanny’s).   So why not run Pepsi through the Dividend Diplomat Stock Screener and see if I will be adding any shares to my portfolio?


About Pepsi and the Company’s Brands

Pepsi is one of the two largest companies (Coke) in the snack and beverage industry.  While I won’t list every brand the company owns, the company has some of the industry’s most recognizable brands.  Have you heard of Pepsi, Lays, Mountain Dew, Gatorade, Quaker Oats, Doritos, Lipton, Fritos, Tostinos, Cheetos, and Ruffles*?  All of these titans in the industry all fall under the Pepsi umbrella, which makes it unique compared to its competitors Coca-Cola and Dr. Pepper Snapple Group (“Dr. Pepper”) that are predominately beverage based.   This diversification gives Pepsi a competitive edge over its rivals; having big time snack brands provides Pepsi  another way into a family’s shopping cart and protects the company from any pop-industry events (yes, I call it pop and not soda).  As you know, I am a big proponent of brands that find their way into every family’s house (I love and own Kraft and Procter & Gamble for that reason), so the more opportunities a Pepsi product has to leave a store in a grocery bag the better.


Dividend Diplomat Stock Screener

As discussed above, the diversification of Pepsi’s brand portfolio is a major competitive advantage for the company.  Now it is time to look at the company’s financial performance and compare Pepsi to Coca-Cola and Dr. Pepper using the Dividend Diplomat Stock Screener.

Metric #1: Price to Earnings Ratio Less than the S&P 500

Currently, the S&P 500 P/E Ratio approximates 19.75 and changes on a daily basis.  So we will use 19.75 for the purposes of our comparison.  Using the September 17th, 2014 closing prices and the P/E and Forward P/E ratios listed on, we created the table below.  The table shows that the two major companies in the industry, Pepsi and Coke, are currently trading at a premium to the market while Dr. Pepper is trading at a slight discount.  For that reason, Pepsi fails the first Dividend Diplomat metric while Dr. Pepper receives a pass rating.

PEP Price to Earnings Ratio

 Metric #2: Payout Ratio Less than 60%

It is critical that a dividend growth company has room to grow their dividend in the future.  Sounds simple, right?  As Lanny and I have learned the hard way, a dividend paying stock one day does not necessarily mean a company can always maintain the current dividend.  We consider 60% a very healthy payout ratio to maintain the dividend distribution.  If below, even better, as there would be tremendous room to grow the dividend payment.  Luckily, as we can see below, all three companies have payout ratios below 60% with Dr. Pepper having the lowest of the group, a positive for all three companies! Pepsi’s payout ratio passes the second metric.

PEP payout Ratio


Metric #3: Dividend Growth

We like our dividend stocks to grow their dividend over time.  A dividend increase below inflation results in a negative real yield, so ideally we look for dividend growth rates greater than inflation (~3%).  The table below contains the average dividend increase for each company over the last five dividend increases.  All three companies have growth rates in excess of inflation.  While Pepsi only has a high single digit dividend growth, it is in line with the annual increase of P&G (Another mature consumer staple company) and is still greater than inflation.  Therefore, Pepsi’s dividend growth rate passes the third metric.

PEP Dividend Increase

Note: While Dr. Pepper’s growth rate appears much higher than Pepsi and Coca-Cola’s growth rates, Dr. Pepper increase their dividend from $.15 to $.25 five dividend increases ago.  This caused the total to jump and all other increases were much lower.  If removed, Dr. Pepper would have a dividend growth rate of 13.46% over the last 4 dividend increases.  This is still greater than Pepsi and Coca-Cola, however.

Bonus Metric: comparing  5 Year Average Dividend Yield to Current Dividend Yield

A few months ago Lanny wrote about why he uses the 5 year average dividend yield to assess a dividend stock and compares the current yield to this average.  Currently, Pepsi is yielding 2.82% and has an average 5 year dividend rate of 3.01%.   So does this indicate a large dividend increase in the future?  In order to increase their dividend to the 5 year average, Pepsi would have to increase their dividend by $.175 to  $2.79/year or a 6.75% increase.  This increase is in line with their average increase, so this could signal appropriate valuation.    This metric could also signal the stock is slightly overvalued and a pullback would bring the current yield closer to the 5 year average yield.   It would take a 6.65% decline in share price to reach $87.04 in order to increase the current yield to 3.01% (the five year average).  If I had to give a firm answer at this moment, I would say it is a combination of both the anticipated dividend  increase and a slight over-valuation of the stock.


So where do we go from here?  Will I be adding Pepsi to my portfolio in the near future?  Should I consider adding a position in Dr. Pepper instead since it performed better in the 3 Dividend Diplomat Metrics?  The answer is no.  While Dr. Pepper has better metrics, I do not like the fact the company’s brand portfolio is limited to soft drinks.  It is a great company and I love drinking Dr. Pepper, but I want my initial purchase in the soft drink industry to be a diversified company like Pepsi.  In regards to Pepsi, based on the P/E valuations and the Current Yield to 5 Year Average comparison, I would be purchasing a stock that is in the price range of slightly over-valued to properly valued.  While I have purchased stocks that are over-valued in the past (PG for example), I do not have the excess capital to purchase this kind of stock at the moment.  If I were sitting on excess reserves, I would strongly consider initiating a position in Pepsi.  Since that is not the case, I will continue my search for undervalued dividend growth stocks.  One day I will add a position in Pepsi, the timing is just not right now.

What are your current thoughts on Pepsi?  Is it a stock that merit’s a premium purchase price?  Am I crazy for not initiating a position in the company?


Source of Brand Photos: Pepsico Website 

15 thoughts on “Pepsico (Pepsi) Stock Analysis

  1. I think Pepsi is an interesting stock to own in a dividend portfolio. I already own Coke in our portfolio and it’s one of the larger holdings we have so I haven’t looked at Pepsi. I’ve been looking at other sectors. Pepsi does look quite attractive to own if the price drops a bit.

    • If Coke is a major holding and you have to fill another hole in your portfolio, them you can’t splurge on a company like Pepsi. What sectors are you looking at? Do you have a few stocks that you are ready to pull the trigger on?

      Thanks for stopping by!


  2. I own Pepsico. I think it’s a great company. There’s some activist investor trying to breakup the company into a beverage and snacks business. I don’t think that’s right. Management seems to agree that the company should stay whole. Anyways, great analysis as usual! Thanks!

    • Henry,

      Thanks for the kind words. It is a very strong company and it will be a nice company in your portfolio for a long time. I think it would be a mistake for management to split the company. To me, having a diversified brand with products that compliment each other very well are what make the company unique. If you are battling Coke, you need every differentiator you can get. Hopefully management doesn’t cave to this activist!


  3. PEP is a great stock to own especially with its diversification. The stock is little overvalued like you mentioned, but sometimes the market just doesn’t cooperate. I initiated a position in PEP this week through my sharebuilder advantage plan. It is not a lot, but just a start. This plan allows me to invest small amounts over a period of time thus enabling me to average. So I am hoping that the price goes down over the next several weeks/months for me to average down, but if it doesn’t I would still have some stake in the company.

    • If your plan is to average the cost it is much less important if the company is slightly overvalued, just right, or slightly undervalued. You just don’t want to pay too much of a premium. I am torn if it is a company that I am willing to pay that premium for though and since I don’t average like you do, I need the price to come down to pull the trigger. Either way, you are initiating a positino in a strong dividend growth stock, so kudos to you!

      Thanks for stopping by.


  4. Bert,

    It seems like just yesterday that Pepsi was in the 70’s. The funny thing is I thought the price was high then. I am fully vested in Coke as it has looked to be a little better value this year, but I look forward to adding to my Pepsi position in the near future. Thanks for the very informative article.


    • Man. I would kill for Pepsi in the 70s! Have they invested time machines yet? Thanks for the kind words about the article. You ar eright, Coke has been lagging behind Pepsi this year. KO is only up about 4.5% while Pepsi has been killing it at 15%. I like Coke as well, but the company’s current PE is higher than Pepsi’s. So if I can’t pull the trigger on Pepsi, I definitely cannot justify pulling the trigger on Coke. But already having a position in Coke is amazing because it is one of the most recognizable American brands, has been around forever, and is another great dividend stock. Can’t go wrong with either over the long term.


  5. As I already own KO, I was looking to add Pepsi in the near future. Thanks for the analysis and doing the bulk of the work for me! 🙂

    Also, I believe Lipton is not a Pepsi brand, but a Unilever brand. Pepsi only distributes it in North America if I recall correctly!

    • Thanks for the kind word Waffles! Hopefully Pepsi decreases so we can both initiate a position soon. Thanks for bringing the Lipton item to my attention. I was just compiling the list based on pictures on Pepsi’s website haha But as I looked into it now Pepsi and UL created a joint venture to distribute Lipton Ready to Drink products in the 2000s. So technically it is under the Pepsi umbrella, right?

  6. Great valuation of Pepsi, I have to agree with you on your stand point as to why you choose PEP/KO over DPS despite more appealing metrics. End of the day KO/PEP are able to reach out to a broad market of people and ultimately these are the guys who will continue to be be around for years to come. Had I have the capital I would initiate position with KO, even though it has the highest P/E I feel as though I am willing to pay the extra for the peace of mind knowing a have a company i would consider to be the best of the best in consumer beverages. thanks for posting


    • Ace,

      Thanks for stopping by and the kind words about the analysis. It is not that DPS is a bad company, but as you mentioned it just doesn’t have the presence of KO/PEP. KO is great company as well and you couldn’t go wrong by initiating a position in the company. I would not necessarily pay the premium right now since I am a bigger fan of PEP, I can easily undersand why you or any other DGI would. Great company that will serve your portfolio well as a buy and hold company.

      Thanks again, I look forward to reading your blog andd following your journey towards financial freedom.


  7. Bert,
    When I decided to become an active dividend growth investor last year, PEP was one of the first 3 stocks that I bought. The other two are PG and JNJ, plus I added AAPL shortly thereafter. All 4 have done well (especially AAPL, but I trimmed my position recently after the huge run-up). My wife and I now own 49 stocks after liquidating the index funds, and PEP, PG, and JNJ are the largest and the only ones that are more than 3% of our portfolio.

    We now hold 2% of our portfolio in KO since the price dipped into under valued territory IMO. I think you can have both PEP and KO as long as it doesn’t get to be too big of a percentage, but only you can make that decision. I believe that PEP is the better investment because of the diversity of products, but only time will tell. In any event, I believe that owning strong brands with worldwide sales and healthy balance sheets is always a good move.

    Good luck,

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