Pepsi: Is This Dividend-Paying Stock a Buy Right Now?

Pepsi (NASDAQ: PEP) is one of the most popular brands in the world. Trading at a market cap of $203 billion, this global behemoth has delivered consistent returns for investors. In the last 10 years, PEP stock has returned 185%, underperforming the S&P 500 that has returned over 300% in this period.

However, Pepsi has managed to easily outpace inflation rates while providing investors with a tasty dividend yield of almost 3%. Comparatively, the S&P 500 Index has a yield of just 1.33%. Let’s see if Pepsi stock should be part of your watchlist right now.

Pepsi sales rose 2% in Q1

Pepsi’s organic sales in Q1 rose 2% year over year driven by strong performance in its food and beverage divisions. However, it was lower than the revenue growth of 6% in Q4 of 2020. Further, Pepsi’s sales rose due to price increases rather than volume gains in the March quarter. But investors should also note that in Q1 of 2020, people in most global markets stocked products during the first wave of the dreaded pandemic which led to an 8% increase in organic sales.

During the company’s quarterly earnings call, CEO Ramon Laguarta said, “We successfully overcame challenges related to difficult year-over-year comparisons, uneven recoveries across many of our international markets, and weather-related business disruptions in the U.S."

The increase in sales allowed Pepsi to end Q1 with an operating profit of $2.3 billion, compared to less than $2 billion in the year-ago period.

However, the management warned shareholders that earnings gains will be modest in the upcoming quarters as Pepsi aims to increase spending on its manufacturing and distribution networks. In Q1, its net earnings rose by an impressive 14% year over year.

In the last year, Pepsi increased its debt to offset any disruptions in its supply chain amid the pandemic. It ended the quarter with a cash balance of $6.62 billion and $43.66 billion in debt. The company also confirmed it will limit its buyback program as it invests in core businesses.

What next for PEP stock investors?

Pepsi has been one of the dividend stocks on the S&P 500 and is just a year away from achieving the status of a Dividend King. A dividend king company is one that has increased sales for 50 consecutive years. In the last 12-months, Pepsi distributed 86% of its free cash flow as dividends making another dividend increase very likely in 2021.

Pepsi has a diversified portfolio of snacks and soft drinks and is part of a recession-proof industry. Its cash flows are stable and predictable allowing the management to keep increasing dividend payouts each year. However, analysts expect Pepsi’s bottom-line to decline as it upgrades its supply chain network and invests in niches such as energy drinks.

Analysts expect sales to rise by 7.1% to $75.4 billion in 2021 and by 4.6% to $78.83 billion in 2022. This will allow the company to increase earnings by 10.3% in 2021 and by 8% in 2022. Earnings are also forecast to rise at an annual rate of 9.2% in the next five years.

PEP stock is trading at a forward price to earnings multiple of 24x which might seem expensive given its earnings growth estimates. Wall Street expects PEP stock to touch $155 in the next 12-months, indicating an upside potential of 6%. After accounting for its dividend yield, total returns will be closer to 9%.

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