PEP Stock Should Be Considered a Stock to Own
PepsiCo, Inc. (NYSE:PEP) stock is a company that continues to reward its shareholders.
Shares of PEP stock are up 68% over the past five years. As an investor, you may be wondering if there is a possibility of more upside ahead, or if the good news is built into the current price.
Let me explain three reasons why I am bullish on PEP stock.
Returning Money to Shareholders
PEP stock is trading at $105.34, which is yielding 2.86%. The current dividend is paid on a quarterly basis to investors. The annual earnings are $4.80, from which an annual dividend of $3.01 is paid to investors. This would represent a dividend payout ratio of approximately 62%. With a conservation payout ratio, there exists the chance of future dividend hikes.
A future dividend hike wouldn’t be the first, given they have occurred for Pepsi stock for the past 44 years, both at time when the economy is growing or in a recession. As a income investor, this is what should be expected from a dividend-paying stock.
Other than the dividend, PepsiCo has used surplus cash for share repurchases amounting to $7.0 billion. Buybacks help increase a shareholder’s new worth, as well as their total ownership of the company; fewer shares available mean the remaining ones are worth more. (Source: “PepsiCo Reports Fourth Quarter and Full-Year 2015 Results,” PepsiCo, Inc., February 11, 2016.)
Fundamentals of PEP Stock
Over the past five years, Pepsi’s cash and short-term investments have nearly tripled. Meanwhile, the short and current long-term debt has decreased by more than a third. In other words, the company has become leaner.
The price-to-sales ratio is what is best used to compare Pepsi to its peers. This ratio provides information about how the current trading price of the stock is compared to the sales that are generated over a period of a year. For PEP stock, the price-to-sales ratio is 2.4 times, which is cheaper than the industry average of 3.5 times.
For patient, long-term investors, the volatility is another aspect to consider. Compared to the index, PEP stock’s price movement is less than the overall index. This is important when an investor wants to protect their invested capital.
Global Diversification
Pepsi operates in more than 200 countries around the world. This is great from an investor’s point of view, since if one country sees a slump in sales, another could see growth and pick up the slack. Another benefit of PepsiCo being a global company is that it generates revenue in many different currencies. Since PepsiCo is based in the U.S., foreign currencies are compared to U.S. dollars.
There will be times the foreign currencies could see a capital gain that is reflected in the bottom line of PEP stock. And should it be an unfavorable time to make a capital gain on foreign exchange, the money could simply be parked in a bank account to earn some interest in the meantime. But being based in the U.S., PepsiCo’s savings accounts are not offering much return in the form of interest rates. There are other countries that offer a much higher interest rate on cash that is parked in a savings account, such as India’s over five percent.
Final Thoughts on PEP Stock
PEP should be considered due to the global diversification and the company’s efforts to reward shareholders. The balance sheet has been getting stronger, which is a long-term benefit.
A shareholder-friendly company that pays out increasing dividends, the possibility of more dividend hikes and share repurchases exists for PEP stock.