PepsiCo's (NASDAQ:PEP) Shareholders Will Receive A Bigger Dividend Than Last Year

PepsiCo, Inc. (NASDAQ:PEP) has announced that it will be increasing its dividend from last year's comparable payment on the 30th of June to $1.26. This takes the annual payment to 2.8% of the current stock price, which is about average for the industry.

View our latest analysis for PepsiCo

PepsiCo's Payment Has Solid Earnings Coverage

Solid dividend yields are great, but they only really help us if the payment is sustainable. Before making this announcement, the company's dividend was much higher than its earnings. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

Looking forward, earnings per share is forecast to rise by 79.1% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 59% which would be quite comfortable going to take the dividend forward.

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 annual payment during the last 10 years was $2.15 in 2013, and the most recent fiscal year payment was $5.06. This implies that the company grew its distributions at a yearly rate of about 8.9% over that duration. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

There Isn't Much Room To Grow The Dividend

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. PepsiCo has impressed us by growing EPS at 6.9% per year over the past five years. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.

PepsiCo's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think PepsiCo's payments are rock solid. 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 be a touch cautious of relying on this stock primarily for the dividend income.

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. Case in point: We've spotted 5 warning signs for PepsiCo (of which 1 is potentially serious!) you should know about. 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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