Dividend Investor Portfolio #23: Sparkling Profits
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Dear Investor,
Welcome to the 23rd edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: August 26, 2024
Stock fluctuated between daily gains and losses throughout the week as investors awaited the latest updates from the Federal Reserve. Stocks jumped up after the new monetary policy path was announced at Jackson Hole last Friday. As a result, the Dow Jones Industrial Average (DJIA) rose 1.27% on the week, now standing less than 0.1% from its record close. The S&P 500 (SPX) added 1.45%, reaching 0.6% below its all-time high. The tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) closed the week with gains of 1.40% and 1.09%, respectively.
In his speech, Fed Chair Jerome Powell affirmed expectations for an impending monetary policy pivot. Powell said that “the time has come for policy to adjust,” adding that “the timing and pace of rate cuts will depend on incoming data.” The speech did not provide details regarding the extent and pace of the coming monetary easing.
However, analysts interpreted the familiar “data-dependency” tune as the policymakers’ intention to focus on developments in the labor market. As inflation has trended lower toward the Fed’s target range, the job market has simultaneously weakened in recent months. This led to rising concern among market participants that the central bank may have overdone the tightening measures. Powell acknowledged these worries, saying that the Fed sees further weakening of the labor-market conditions as “unwelcome.”
Most analysts and investors anticipate a 0.25% rate cut at the Fed’s next meeting in September. However, some have argued that if the payroll report – due next Friday – comes in weaker than expected, it could prompt the Fed to reduce rates by as much as 50 basis points.
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This Week’s Quality Dividend Stock Idea
PepsiCo, Inc. (PEP) is an American global food, snack, and beverage corporation, which manufactures and sells various beverages and convenient foods worldwide. It is one of the world’s largest food and beverage companies.
The company’s roots stretch to 1902 when a pharmacist founded “The Pepsi-Cola Company”, the producer of the namesake drink. After decades of changing hands over the trademark and syrup recipe, the company emerged in its current form in 1965 with the merger between the Pepsi-Cola Company and Frito-Lay, Inc.
Since then, PepsiCo has expanded globally and has immensely grown and diversified its product portfolio. The company’s expansion was led by acquisitions, such as SodaStream in 2018, Pioneer Foods in 2019, and Rockstar Energy in 2020.
Today, with a market capitalization of $241.6 billion and annual revenues of $91.6 billion, PepsiCo is the second-largest food and beverage business in the world after Nestlé, ranking #44 on the Fortune 500 list.
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A Family of Billion-Dollar Brands
PepsiCo’s business is highly diversified by products and geographies. Consumers in more than 200 countries and territories around the world purchase over one billion PepsiCo products every day. The company has 23 brands that generate more than $1 billion each in annual retail sales. These include iconic brands such as Lay’s, Gatorade, Pepsi-Cola, Quaker, and others.
Despite being best known for its soft drink, the company derives 59% of its net annual revenue from food products, while 41% comes from beverages. 57% of revenues stem from the U.S., with the rest derived globally.
PepsiCo operates through seven reporting segments: PepsiCo Beverages North America (responsible for 30% of annual revenues), Frito-Lay North America (27%), Europe (15%), Latin America (13%), Africa, Middle East and South Asia (7%), Asia Pacific (5%), and Quaker Foods North America (3%).
PEP’s snack foods arm Frito-Lay is a global snack leader, holding over 30% market share worldwide and more than 40% in the U.S. The company’s iconic Pepsi-Cola remains the world’s second most-favorite soda after Coca-Cola Classic. PepsiCo’s carbonated drink products division holds a market share of over 20% in the U.S. and about 9% globally.
In addition to its portfolio of products, PEP capitalizes on many collaborations with other well-known brands; for example, it distributes canned and bottled Starbucks drinks and Lipton’s bottled teas. Besides, the company continuously expands into additional product offerings, reaching various end markets.
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Steady Earnings Growth
Thanks to its significant scale, brand strength, geographic reach, and product diversification, PepsiCo boasts high earnings and margin stability. The company’s quarterly earnings-per-share have registered steady year-over-year increases every quarter in the past several years, with the only exception during the global pandemic. PEP’s annual revenues and earnings have also been steadily increasing through the years, with strong margins supported by the company’s cost-effective business structure.
In Q2 2024, PEP surpassed analysts’ EPS estimates, as it did in all quarters for which these estimates were available. Despite macroeconomic headwinds, such as elevated interest rates affecting consumers, the company delivered net revenue growth, strong gross and operating margin expansion, and double-digit EPS growth. PepsiCo expects its core constant currency EPS to rise by at least 8% in 2024, which would propel it to a record high. Moreover, analysts forecast long-term annual EPS growth of 6-7%.
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Dividend King’s Crown
PepsiCo’s steady growth and strong profitability support its dividend profile. The company takes pride in its “Dividend King” status, having paid and raised its dividends annually for the last 52 years. Its current dividend yield stands at 3.01%, above the average for the Consumer Staples sector.
With its reasonable payout ratio, PEP’s dividend payments are well-covered by earnings, with the company having ample room to further raise its payouts. In the past decade, PepsiCo has increased its payouts at a CAGR of over 8%. The latest such increase was in June 2024, when the payout was raised by 7%. Moreover, analysts expect the company to continue raising its payout at a 6-7% annual rate for the foreseeable future.
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Total Return in Focus
In addition to dividends, PepsiCo rewards its shareholders with share repurchases. While it doesn’t prioritize large buybacks, instead routing most of its free cash flows to dividends, PEP has repurchased 7% of its outstanding shares in the past decade. In the first half of 2024, the company performed buybacks for $478 million and plans to reach $1 billion in share repurchases by the year-end.
Despite its strong business profile and alignment with shareholder interests, PepsiCo’s stock has been trading sideways in the past 12 months, resulting in a decline of ~2% over that period. This underperformance versus the broad market was the result of general investor pullback from low-growth stocks amid the tech rally, as well as concerns over consumer spending at the time of high interest rates, coupled with elevated consumer sensitivity to price increases. In addition, snack and sweetened drink producers have suffered from investor pullback on the back of the “Ozempic effect,” although so far the impact on sales from weight-loss drugs has been negligible.
Due to the weak stock performance in the past year, PEP is now trading at moderate valuations. PepsiCo now features a lower premium to its sector than a year ago and comes in the middle of the price range for comparable peers in the industry. Taking into account the positive effects of subsiding macroeconomic headwinds thanks to the expected rate cuts, as well as the outlook for a much more favorable foreign exchange picture down the road, the stock appears undervalued vis-à-vis its expected earnings growth. Moreover, based on its forecasted cash flows, PepsiCo appears undervalued by about 35%.
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Investing Takeaway
PepsiCo, Inc. is one of the largest and best-known companies in the world, holding a wide portfolio of well-recognized brand names. Its long track record of stable business expansion and earnings growth supports its profile as one of the most dependable dividend payers globally. The company’s stock is currently trading at an attractive valuation, making this a long-term value proposition as well as an income investment one. Therefore, we view PEP as an attractive addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ LyondellBasell (LYB) is going ex-dividend today, August 26th, with the payment date on September 3rd. In other news, LyondellBasell has announced an acquisition of a Germany-based company APK AG. The buyout is expected to increase LYB’s Circular and Low Carbon Solutions Business and diversification of innovative recycling technologies.
¤ Kroger (KR) sold $10.5 billion of bonds to help fund its acquisition of Albertsons in the fifth-largest U.S. investment-grade bond sale this year. The planned $24.6 billion buyout has been blocked by the Federal Trade Commission (FTC) which said it would limit competition and raise food prices. However, Kroger filed a lawsuit against the FTC claiming that the agency’s internal judicial process is unconstitutional. The grocer’s claim is based on several recent Supreme Court rulings concerning the extent of the FTC’s powers, as well as the opinions of attorneys general in Ohio, Alabama, Georgia, and Iowa, who filed an amicus brief in favor of the merger with a federal court in Oregon.
¤ Amgen (AMGN) announced that its treatment Otezla (apremilast) has been made available in the U.S. for pediatric use. Earlier this year, the FDA approved Otezla for the treatment of moderate to severe plaque psoriasis in children and adolescents. It is currently the only FDA-approved oral medication for the diagnosis in this patient population.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.60% | +10.24% | $3,821.72 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 2.62% | $9.00 |
| BlackRock (BLK) | Sep 09, 2024 | Sep 23, 2024 | 2.41% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 3.97% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.04% | $4.60 |
| Kroger (KR) | Aug 15, 2024 | Sep 01, 2024 | 2.12% | $1.28 |
| LyondellBasell (LYB) | Aug 30, 2024 | Sep 05, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 4.59% | $5.20 |
| Qualcomm (QCOM) | Aug 29, 2024 | Sep 20, 2024 | 1.85% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
