This Stock Has Raised Dividends for 42 Years in a Row

yield-stockphotoWhen you think of the safest companies in the world to invest in, what comes to mind?

What about companies that offer products that are so ubiquitous, that consumers buy them even when there is a massive economic downturn?

See, I love to invest in companies that are not only incredibly simple to understand, but also those that offer products that practically sell themselves.

If a recession hits, are people going to stop buying their morning oatmeal or cereal?

What are the odds that people stop buying beverages like orange juice, soft drinks, bottled water, and iced tea any time soon?

[ad#Google Adsense 336×280-IA]While there are a lot of companies out there that are somewhat sensitive to economic cycles, food and beverage companies generally are not.

And that’s because these products are a part of our everyday lives, and some of these products (like water) are necessary to sustain human life.

Take a company like PepsiCo, Inc. (PEP).

This is a global business that’s been around since the early 1900s.

From those early roots, they’ve turned into a branded beverage and snack powerhouse with a market cap north of $140 billion.

If you’re looking for a safe company to invest in that you’re confident will continue sending growing dividends your way for many years, PepsiCo might just fit the bill.

After all, this is a company that offers its products across over 200 countries and territories throughout the world. So that means no one country’s economic issues can overwhelm the business.

And not only do they have geographical diversification, but they also have product diversification. And not just products, but branded products. High-quality branded products give this company competitive advantages, as it allows them pricing power over time. If you like the quality and taste of Quaker oatmeal, the odds are strong that you’re going to continue buying and using that product.

Their brands and products stretch the gamut of snacks and beverages: Quaker, Tostitos, Pepsi, Tropicana, Ruffles, Aquafina, Fritos, Mountain Dew, Gatorade, and Doritos.

If you remember just one fact about this company, this might be a good one: They own 22 billion-dollar brands. 22!

But what does all of this mean? How many people are buying Pepsi and Doritos?

Apparently a lot.

Revenue grew from $29.261 billion in fiscal year 2004 to $66.415 billion throughout fiscal year 2013. That’s a compound annual growth rate of 9.54%. I don’t know what’s more refreshing: their soft drinks or top-line growth.

Meanwhile, earnings per share increased from $2.41 to $4.32 over this period, which is a CAGR of 6.70%. Not quite as impressive as what revenue growth has registered, but still solid nonetheless.

S&P Capital IQ is anticipating that EPS will compound at a 7% annual rate over the next three years, which is obviously shouldn’t be much of a stretch for PEP.

The growth is solid, but the dividend growth record is spectacular.

The company has increased the dividend for the past 42 consecutive years. You don’t amass a streak like that without decades of increasing profits, which is likely possible because of the strong brand names and ubiquitous products they manufacture and provide.

This record qualifies PEP as a “Champion” on David Fish’s Dividend Champions, Contenders, and Challengers list – a document that compiles and tracks all US-listed stocks with at least five consecutive years of dividend increases.

And the dividend raises themselves have been fairly generous – the 10-year dividend growth rate is 13.7%.

With a yield of 2.75%, shares also offer an attractive income proposition on top of the quality.

The dividend is well-covered, with a relatively healthy payout ratio of just 58%.

122314PEP also has a pretty decent balance sheet.

It’s not stellar, but the company isn’t overly leveraged.

The long-term debt and shareholders’ equity was almost completely even at the end of the last fiscal year, both at approximately $24 billion. But the interest coverage ratio indicates pretty solid financial health, at 10.76.

One would probably expect pretty robust profitability from a branded products company, and PEP doesn’t disappoint. Net margin has averaged 10.8% over the last five years, while return on equity averaged 33.4%. Strong numbers.

You can probably see by now why I’m a shareholder in the company. Great products, great brands, great track record, and obviously shareholder friendly.

Though some of their products are not inherently healthy, CEO Indra Nooyi has done a great job in building out healthier options among the company’s offerings. This is a forward-looking strategy, as the marketplace continues to demand healthier and fresher foods and beverages. They categorize some of their products in their “Good-For-You Brands”, which includes Tropicana Farmstand 100% fruit and vegetable juice. You can also find Aquafina bottled water here. And Naked Juice. Healthier choices will likely propel this company forward and keep them relevant with new consumers.

Shares aren’t particularly cheap right now – the P/E ratio is 21.08. That doesn’t compare particularly well to PEP’s five-year average of 17.2. However, it’s often tough to find a high-quality and defensive stock like PEP on sale.

I valued shares myself using a dividend discount model analysis with a 10% discount rate and a 6.5% long-term growth rate. That rate appears fair and conservative. It’s a bit below the company’s long-term EPS growth rate and also well below the dividend growth rate. The dividend will probably only be able to grow about as fast as earnings over the long haul, especially with a payout ratio that is creeping close to 60%. The DDM analysis gives me a fair value of $79.72.


Bottom line: PepsiCo, Inc. (PEP) is a global juggernaut in beverage and snacks. They sport 22 $1 billion brands, and offer their products across more than 200 countries and territories. It’s unlikely that, no matter what’s going in with the economy, people will stop buying their products. Their lengthy and impressive dividend growth streak speaks for itself, and the odds are pretty strong that the company will continue handing out dividend increases for the foreseeable future. If you’re looking for a great company that offers strong brands and returns healthy cash back to shareholders, PepsiCo may quench your thirst.

— Jason Fieber, Dividend Mantra