Latest purchase: PepsiCo

05E07AE7-EBAE-430F-9826-ED59387D0C05Today I purchased 9 stocks of PepsiCo (NYSE: PEP). I have tracked the price for some months and didn’t want to step in for a price around $110. Mr. Market got more depressed the last couple of weeks as food and beverage companies in general have fallen out of favor, and offered this great company for sub $100 prices. As expected, I waited too long (again) and got in at still a fair price of $100.45 (including transaction fee). I was eager to own a stake in this business as it’s always nice to add a dividend aristocrat to your basket of dividend paying companies.

PepsiCo has been on my watchlist for the last two years. It’s a great company with 22 $1B brands! It has a global footprint in over 200 countries. PepsiCo has a nice diversified portfolio of food and beverage products like Pepsi (Ah, I see), Gatorade, Quaker, Tropicana, Frito-Lay and much more. Their record of increasing their dividends for 46 years in a row is a proof of their sustainable business model and ability to generate free cash flow. PepsiCo continues to expect $7B in free cash flow for the full fiscal year. Their competitor Coca-Cola (NYSE: KO) has a mythical status; their brand recognition and marketing machine are exceptional (holidays are coming, holidays are coming…). Besides, uncle Warren made loads of money investing in this business. But their future shareholder returns do look a bit mediocre as compared to PepsiCo, imho. As consumer demand continues to shift towards nutritious products, PepsiCo is responding by improving the nutritional profile of many of its products by reducing sodium, added sugars and saturated fat. Pepsi also shifted their focus to the higher growth, higher margin snacks category, which should drive solid corporate results despite beverage market share weakness in general.

At the time of purchase the stock traded for a P/E of 17.5 (EPS based on the estimates of analysts for 2018). I usually wait for a lower P/E metric, say in the 15-16 range. But as always quality comes with a price. Besides, I really try to see my purchases in the bigger picture: “Does it really matter if I pay 15 or 17 times earnings for a share in a great business when my holding period is forever?” In case of a further stock price decline, I’ll gladly add more PepsiCo stocks in my beloved basket.

At the P/E ratio of 17.5, I locked in a forward dividend yield of 3.71%. They’re paying me $0.9275 per quarter. So 9 shares totals to $33.39 on a yearly basis. Not bad, not bad at all. I have to say that I’d like to buy/add stocks to my portfolio at a 4+% yield. But, I’ll get around that number if the stock price may fall further. So this is a good starting position.

As I wrote earlier, PepsiCo has rewarded their shareholders for quite a number of years. They’ve increased their dividends for 46 years in a row. Let that sink in. A continuous dividend increase since 1973. Elvis was still alive back then! You’d expect that the dividend growth rate may slow down, but after increasing their dividend with a 7-10% increase for the last 5 years, they increased it with a whopping 15.2% from their prior dividend of $0.805. This stresses the confidence of management in the resilience of their business model.

The dividend payout ratio based on analysts consensus of earnings in 2018 comes down to 65%. This is a reasonable percentage for a company with a resilient business model selling multiple A-products. I certainly don’t expect multiple 10+% increases in a row from now on. Increases of 7% would do it for me.

GuruFocus states that PepsiCo’s highest Return on Capital (Joel Greenblatt) was 69.25%. The current Return on Capital sits around 63.32% so this company surely knows how to create value. Their RoC is even ranked higher than 90% of the 102 companies in the global industry!

The company announced in February a new stock repurchase program up to $15B common stock commencing on July 1, 2018, which will replace the $12B repurchase program that is scheduled to expire on June 30, 2018. The market cap of PepsiCo is around $142B so the addition equates to more than 2%. Nice!

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8 thoughts on “Latest purchase: PepsiCo

  1. Like the PEP buy. It’s been with me for many, many years since I went the DGI route. I just added a bit this month to my holding. Keep buying quality!

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    • Divhut, thanks for your comment. I’ve been reading your blog regularly last years. Great to see you stopping by. I plan to buy more stocks of PEP, hopefully the price pressure will stay for a while. Your yield on cost will be around 4.5%, I guess. Very nice!

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  2. I can see you’ve been a dividend investor for a while after looking at your portfolio. PEP is a nice addition, Glenn. You make a good case for adding when you did.
    You mention targeting stocks with a yield over 4%, and I can see that your portfolio reflects that. One question with regard to this… Any reason you don’t target higher growth, lower yield stocks considering you are about 20 years from your FI target?
    Nice job on the post…. keep them coming!

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    • Thanks for commenting. I’ve been investing since half way 2015 in dividend growth stocks. You made a fair point about not buying higher growth, lower yield stocks. I had my eyes on SBX and NKE last year when they had gone south. But I waited too long to step in. I think SBX is in the buy zone again, but there are some great names for sale right now: CLX, JNJ, MO, PEP, PG, PM to name a few. So yes, the higher growth, lower yield stocks are on my radar, but I can’t, for example, rationalize an investment in MA or V. The valuation metrics are through the roof. I really, really like their business model, but try to lock in a margin of safety when buying dividend growth stocks.

      Please feel free to share your view on the stocks you mentioned.

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  3. NKE has had a nice run since Q4 of last year after trading sideways for over a year. I own both SBUX and NKE, and like you would prefer SBUX at this time if making a purchase – based on value. I’d like to own a bit more SBUX, but prefer to see a slightly lower price before adding more.
    I own V and was lucky to get in before a big run up in price. I agree that an investment at the current level looks hard to justify.
    Lots of quality names on your watchlist, so it will be hard to go wrong from a company perspective. As you said, you just have to find an entry point that offers you a good valuation, and an acceptable margin of safety.

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    • In hindsight I should have initiated a position around the price of $50. The stock price had declined because of worries about losing market share to Adidas and Under Armour. The dividend yield was around 2% and the P/E like 20. Now the stock is 40% higher. Why didn’t I invest? I obviously preferred another position as I invest my savings on a monthly basis. I think it was XOM back then. But what also came into play was the low dividend yield of NKE as compared to my portfolio. I’m and was too much focused on that weighted average yield. You’re right about that. But seeing your dividend income grow like crazy in the early years is motivating.

      Right now I’m following SBUX as my next target of low yielding stocks. The dividend yield is 2%. The stock price may decline further so that would be a nice opportunity to average down. Nice to read you own both stocks. Their large dividend increases will likely continue especially as the growth numbers in China will take off. Thanks for your reply, I made me realize to restore my focus a bit on the growth number. 👍

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