Tuesday, May 10, 2011

A Closer Look At PepsiCo Inc.

There are a number of large cap stocks that are turning into good dividend stock for investors that are looking for income. Small cap stocks have had a much larger run up compared to large caps which has led to some large cap stocks becoming the place that investors can look to for safety during market swing. Today, I want to take a look at a large cap stock that is growing it earnings and increasing its dividend.

PepsiCo Inc. (PEP) is the second largest soft drink company in the United States right behind Coca Cola. Pepsi is far more than just drinks as the company manufactures a number of food and snack products around the world. The company is responsible for popular products like Gatorade, Doritos, Cheetos, Quaker, and Frito Lay brands.

Pepsi has been a long time market favorite as the company has done a great job of increasing revenues and profitability over time. The manufacturer has been able to grow earnings 6.3% over the last five years and 9% so far this year. Pepsi generates massive amounts of free cash flow and generously returns it back to shareholders. The company had $8.5 billion dollars in cash flow from operations last year.

The company recently raised its quarterly distribution by 7.3% to $2.06 cents per share for the year. The company’s shares are now yielding 3% making Pepsi a decent dividend play. The recent increase marks the sixth consecutive annual dividend raise for the company. The dividend is easily sustainable with the current payout rate representing 45.6% of Pepsi’s earnings.

Although I think that the dividend is solid, the stock is not cheap. Investors have to pay 15 times this year’s earnings in order to buy Pepsi’s shares. That is not cheap for a company that can conservatively grow earnings at an 8 to 9% clip for this year. Pepsi is cheaper than Coke however which has a slighter higher earnings growth rate but a higher P/E ratio attached as well.

Investors that are looking for a company that should continue to thrive over the next few years and that has a dividend with staying power can do a lot worse than investing in Pepsi.

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