PepsiCo (NASDAQ:PEP) Will Pay A Larger Dividend Than Last Year At $1.36

The board of PepsiCo, Inc. (NASDAQ:PEP) has announced that it will be increasing its dividend by 7.1% on the 28th of June to $1.36, up from last year's comparable payment of $1.26. This takes the annual payment to 2.9% of the current stock price, which is about average for the industry.

Check out our latest analysis for PepsiCo

PepsiCo's Earnings Easily Cover The Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. At the time of the last dividend payment, PepsiCo was paying out a very large proportion of what it was earning and 96% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Looking forward, earnings per share is forecast to rise by 41.1% over the next year. 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

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from an annual total of $2.27 in 2014 to the most recent total annual payment of $5.06. This implies that the company grew its distributions at a yearly rate of about 8.3% over that duration. 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.

Dividend Growth Is Doubtful

Investors could be attracted to the stock based on the quality of its payment history. However, things aren't all that rosy. It's not great to see that PepsiCo's earnings per share has fallen at approximately 5.6% per year over the past five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 3 warning signs for PepsiCo that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.