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Stock Analysis: PepsiCo

PepsiCo, Inc. manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend aristocrat which has increased distributions for 38 years in a row.

Over the past decade this dividend stock has delivered an annualized total return of 4.90% to its loyal shareholders.

The company has managed to deliver an average increase in EPS of 10.90% per year since 2000. Analysts expect PepsiCo to earn $4.12 per share in 2010 and $4.61 per share in 2011. This would be a nice increase from the $3.77/share the company earned in 2009.
The company has a high return on equity, which has remained above 30%, with the exception of a brief decrease in 2004. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment in US dollars has increased by 13.70% per year since 2000. A 14% growth in distributions translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1978, we see that PepsiCo has actually managed to double its dividend every six and a half years on average.

Over the past decade the dividend payout ratio has remained above 50% only in 2008. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, PepsiCo is attractively valued at 16.50 times earnings, yields 2.90% and has a sustainable dividend payout. In comparison Coca Cola (KO) yields 2.70% and trades at a P/E of 20. I would continue monitoring PepsiCo and will consider adding to my position in the stock on dips.

Full Disclosure: Long PEP and KO

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