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It's not often that a stock that consistently raises dividends trades at a discount. But that's the case with PepsiCo (NASDAQ: PEP).
Despite the company's long dividend history, investors have been dismayed by the company's recent earnings. However, that creates a buying opportunity for investors looking for steadily rising dividends and potential capital appreciation.
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Here's a closer examination of why PepsiCo's dividend-raising streak doesn't look likely to end anytime soon.
PepsiCo's dividend-raising streak has reached 54 years. There's a special group for companies that have increased payments for at least 50 straight years: Dividend Kings.
The board of directors hasn't been approving nominal, small increases, either. PepsiCo raised June's payout by 4% to $1.48 per share. This latest boost looks sustainable, based on the company's earnings. PepsiCo's payout ratio, or dividends compared to earnings, is 73%.
The shares also have a much higher dividend yield than the overall stock market, as measured by the S&P 500 index, which investors often use as a proxy for large-cap stocks. PepsiCo's stock yields 4.2% versus 1.1% for the index.
Consistently increasing dividends, secure payments, and a higher-than-market dividend yield sound good. Yet investors haven't been impressed with PepsiCo's results. This year, through Nov. 6, the share price dove 1.5%, vastly underperforming the S&P 500's 7.8% gain.
The company has struggled with product volume for a while due to a tough economic environment and competitive pressures. There has been some progress on that front, but it's been uneven.
Its fiscal third-quarter revenue (ended Sept. 5), adjusted to remove foreign-currency translation and acquisitions/divestitures, grew 3.1% year over year. However, higher volume only contributed 0.5 percentage points. Also, cost pressures weighed on the bottom line, with adjusted earnings per share (EPS) increasing just 1.5%.
For the year, management now expects EPS to grow 1% to 2%. That's down from its previous guidance of 4% to 6%.
However, PepsiCo should recoup higher costs over time. Notably, management has been focusing on product innovation to win back customers, add volume, and expand the company's margin. These changes take time, though. However, it's positive that the company is taking steps to adjust to consumer tastes.
Aside from the benefits of higher dividends and an attractive yield, the shares appear well-valued. The stock has a price-to-earnings (P/E) ratio of 18 compared to the 10-year median of 26. It also has a lower valuation than the S&P 500, which has a P/E multiple of 25.
The multiple should expand over time as PepsiCo's sales and earnings growth pick up. That creates a powerful opportunity to collect dividends and potentially produce outsize stock gains.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
1 Overlooked Dividend Stock With a 54-Year Winning Streak Worth Buying Now was originally published by The Motley Fool
