PepsiCo, Inc. (NASDAQ:PEP) has announced that it will be increasing its dividend on the 30th of June to US$1.15, which will be 7.0% higher than last year. The announced payment will take the dividend yield to 2.6%, which is in line with the average for the industry.
PepsiCo's Earnings Easily Cover the Distributions
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. PepsiCo was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.
The next year is set to see EPS grow by 10.3%. If the dividend continues on this path, the payout ratio could be 58% by next year, which we think can be pretty sustainable going forward.
PepsiCo Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2012, the first annual payment was US$2.06, compared to the most recent full-year payment of US$4.30. This means that it has been growing its distributions at 7.6% per annum over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.
The Dividend Has Growth Potential
Investors could be attracted to the stock based on the quality of its payment history. PepsiCo has seen EPS rising for the last five years, at 9.5% per annum. Shareholders are getting plenty of the earnings returned to them, which combined with strong growth makes this quite appealing.
Our Thoughts On PepsiCo's Dividend
In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. The payments look okay by most measures, the lack of cash flow could definitely cause problems for them in the future. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for PepsiCo that investors should take into consideration. 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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