Portfolio Update
The FiveTwenty portfolio received $204.30 dividends in the past week. ABBV, APD, CAT, and PG paid their quarterly dividends during the week.
| Past Week Dividend | $204.30 |
| Current Quarter Dividend (Q1 2023) | $746.87 |
| Estimated Annual Dividend | $8,235.54 |
| LifeTime Dividend | $8,855.31 |
The capital allocation for the week of 02/19/2023 to 02/25/2023 will be used to establish a position in PepsiCo Inc. (NASDAQ: PEP)
PEP – Company Profile
PepsiCo Inc. manufactures, markets, distributes and sells beverages and convenience foods globally. The company operates through seven segment: Firto-Lay North America; Quaker Foods North America, PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Aisa; and Asia Pacific, Australia, and New Zealand and China Region. Among the companies best known brands are: Pepsi, Gatorade, SodaStream, Tostitos, Lay’s, Ruffles, and Quaker Oats cereals. Official Site | Wikipedia
| Dividend Streak | 50 years |
| Yield | 2.57% |
| Payout Ratio | 66.64%1 |
| P/E | 25.961 |
1 computed using adjusted (core) EPS of $6.79 as of Q4 2022
Financials
Does PEP have the financial means to sustain and raise its dividend going forward?
Over the last decade, PEP grew sales from $66.4 billion in 2013 to $86.4 billion in 2022, 2.97% CAGR. At the same time core operating profit increased from $10 billion to $12.3 billion, a 2.33% CAGR.
Starting in 2015, PEP removed its Venezuelan subsidiary from its consolidated financial statements and started using the cost method of accounting for the subsidiary. This change combined with large foreign currency exchange headwinds in the Latin America and Europe Sub-Saharan Africa segment accounted for the decrease in revenue between 2014 and 2016.
Over the last 10 year, core EPS have grown from $4.37 to $6.79, a CAGR of about 5%. One of the factors for core EPS growing faster than core operating profit is the reduction in total share outstanding from 1,560 million to 1,387 million between 2013 and 2022.
The average dividend per share growth rate was 8.10% per year in the past 10 years and 6.10% per year in the past 3 years. (per GuruFocus) This impressive dividend growth rate has come with an expansion of the payout ratio as a percent or core EPS from 51% in 2013 to more than 66.6% at the end of 2022.
FY 2022 earnings
For FY 2022, PEP reported strong growth in both revenues and EPS. Net Revenue growth came in at 8.7% and organic revenue grew 14.4%. GAAP EPS were 17% higher than in 2021 and core EPS increased by 8.5%. The company was able to pass on increases in operating costs driven by higher commodity cost as price increases to its customers.
For 2023, the company expects organic revenue growth of 6% and core constant currency EPS growth of 8%. PEP also announced a 10% increase of its quarterly dividend starting with the June 2023 payment. This represents the 51st yearly increase of the dividend payout.
Valuation
Are we paying too much for PEP at the current share price?
In the last 10 years, PEP’s P/E ratio saw a low of 12.29 and a high of 36.24, with a median value of 23.98. (per GuruFocus) The current TTM P/E ratio of 27.9 on GAAP basis is above the historical median but considerably below the peak. However, the TTM P/E of 25.96 on core EPS is in line to where share have traded over the past 3 years.
The current share price of $176.28 is 0.2% below the 50-day moving average and 1.7% above the 200-day moving average. Additionally, the share price is near the 65 percentile of the 52 week trading range.
Yield
How does the current dividend yield for PEP compare to historical values?
In the last 10 years, the dividend yield for PEP has been in a range of 2.42% to 3.68%, with a median of 2.76% (per GuruFocus). The current TTM yield of 2.57% is below the historical median. The 10% increase announced as part of the Q4 earnings report closes the gap to the historical median.
Thesis
Why are we adding PEP to the FiveTwenty portfolio?
PEP has a globally diversified snack food and beverages business, that has proven is resilience over multiple recessions. In addition, the company owns some of the most famous and recognizable global brands, that should allow the company to continue to grow for years to come.
We are adding PEP to the FiveTwenty portfolio with the expectation that it will continue to be a reliable source of growing dividends for many years to come.
Additional Research
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