Stock Analysis: PepsiCo, Inc. (PEP)

Posted by D4L | Monday, May 26, 2008 | | 5 comments »

Linked here is a PDF copy of my detailed analysis of PepsiCo, Inc. (PEP) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: PepsiCo, Inc. (PEP) is a global snack and beverage company. The Company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. PEP is trading at a discount 1.) and 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, PEP is trading at a slight premium (4.0%). A Star is added since PEP is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. PEP earned one Star in this section for 3.) above. PEP has grown dividends for at least 10 years (20+ years).

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. PEP earned no Stars in this section. PEP's NPV MMA Diff. is $5,403, which is below the $10,000 I generally look for. Assuming PEP can grow its dividend at 13% annually, it will take 10 years before dividend earnings exceed the earnings from a hypothetical similar investment in a money market account earning 4.61%.

Other: PEP is a member of the S&P 500, an Aristocrat and an Achiever. I believe PEP has excellent growth opportunities both domestically and abroad. I view PEP as the trend-setter and the industry standard for product innovation. Revenues should grow in 2008 driven my international growth.

Conclusion: PEP earned a Star in the Fair Value section, picked up one Star in the Dividend Analytical Data section and earned no Stars in the Dividend Income vs. MMA section for a net total of 2 Stars. This rates PEP as a 2-Star Weak stock.

The above quantitative analysis may not fully capture PEP's future prospects. Like a sleeping giant that awoke in 2004, PEP has made its presence known. Its average dividend growth from 2004-2007 was a powerful 23% compared to a meager 4.3% from 1998 to 2003. In 2007, PEP's Board raised the target payout from 45% to 50%, so I anticipate double digit dividend increases into the foreseeable future. I calculate 2008's increase to be 15% ($1.43/share to $1.65/share). PEP is a stock that I would add to my portfolio as my allocation and its valuation allows.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I do not owned shares of PEP (0.0% of my Income Portfolio).

What are your thoughts on PEP?


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5 comments

  1. Div Guy // May 28, 2008 at 8:07 PM

    I am a big fan of PEP and just purshased some of the stock for my kids.

  2. Dividends4Life // May 28, 2008 at 9:22 PM

    Div Guy: The more I look at it the more I like it. I may end up buying some next month.

    Best Wishes,
    D4L

  3. Dividend Growth Investor // June 1, 2008 at 12:19 PM

    [...]Dividends4Life presented Stock Analysis: PepsiCo, Inc. (PEP). I myself am a fan of the company. You could read about my opinion here and here[...]

  4. Anonymous // June 2, 2008 at 5:07 AM

    I like Pepsi, though I wonder they have too many businesses to take care of spreading themselves too thin. I looked at your detailed report and I wonder how do you come up with the discount rate to be used in DCF analysis. Is this not the same as cost of capital? Pepsi is a highly rated financially stable company and I wonder whether the discount rate should be some where around 10% especially with interest rates so low.

  5. Dividends4Life // June 2, 2008 at 6:08 AM

    Anon: A management can be stretched too thin and a company can expand beyond their core competency. Hopefully, that is not the case with PEP.

    You are correct when a company is running analysis the DCF is its cost of capital as determined by its debt and equity structure. Current interest rates should have a minimal influence on the COC since it is based on a long period of time 20-50 years. I have found the market tends to discount stocks at a rate around 15%.

    Best Wishes,
    D4L

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