PepsiCo (NASDAQ:PEP) Is Increasing Its Dividend To $1.26

PepsiCo, Inc. (NASDAQ:PEP) has announced that it will be increasing its dividend from last year's comparable payment on the 29th of September to $1.26. The payment will take the dividend yield to 2.7%, which is in line with the average for the industry.

View our latest analysis for PepsiCo

PepsiCo's Earnings Easily Cover The Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, PepsiCo's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 122% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

The next year is set to see EPS grow by 54.1%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 59% which brings it into quite a comfortable range.

PepsiCo Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2013, the annual payment back then was $2.15, compared to the most recent full-year payment of $5.06. This works out to be a compound annual growth rate (CAGR) of approximately 8.9% a year over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.

PepsiCo Might Find It Hard To Grow Its Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. It's encouraging to see that PepsiCo has been growing its earnings per share at 12% a year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Our Thoughts On PepsiCo's Dividend

Overall, we always like to see the dividend being raised, but we don't think PepsiCo will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for PepsiCo that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.