Fizzy Dividends Set to Grow at PepsiCo (PEP)

The world's largest branded snack and beverage company Pepsico (PEP) currently yields over 3% in dividends. How will the aquisition of its bottling company affect the dividend?

Pepsi is one of the world’s most iconic brands. Along with Coca-Cola (KO), there are few other brands that transverse the world as PepsiCo (PEP) products do. This $100 billion behemoth is not only a great company with a strong franchise and growing earnings, but also provides a very satisfying 3.06% dividend yield.
 
PepsiCo (PEP) has the world's largest portfolio of billion-dollar food and beverage brands, including 19 different product lines that each generate more than $1 billion in annual retail sales. PepsiCo (PEP) was founded in 1898 and today owns five brands that each generate over a billion dollars in profits: Pepsi, Tropicana, Frito-Lay, Quaker, and Gatorade. In addition to these brands the company has many other brands that it owns or operates through partnerships. In 1997, the company spun off KFC, Pizza Hut and Taco Bell to an entity which later became Yum! Brands (YUM). The company is also famous for its long and dramatic cola wars principally with rival Coca-Cola (KO). Both sides went to extremes in the 1980s to prove their brand better, including blind taste test and “scientific” testing.
 
PepsiCo’s 2009 full year dividend came in at $1.775 and for the latest quarterly number the dividend was increased to $0.48 per share, which is a 6.6% increase from the prior quarterly dividend. The dividend has grown at 15% annually over the past five years, which is more than Coca-Cola (KO) has managed to grow its payout.
 
The five year average dividend yield is 2.30%, so the fact that it’s sitting at 3.06% is a good sign for conservative investors. You are not able to purchase PepsiCo’s (PEP) future dividend stream at a 33% discount to the five year average.
 
PepsiCo (PEP) recently took a strategic shift that will probably result in cost savings and better distribution going forward, after acquiring Pepsi Bottling Company. Historically, soft drink makers produced syrup which they sold to independent bottling companies to convert into the finished product, and then bottle and distribute it. However, PepsiCo (PEP) announced on August 9, 2009 that it was acquiring The Pepsi Bottling Group and PepsiAmericas. PepsiCo (PEP) believes the transaction will be accretive to earnings per share by at least 15 cents when synergies are fully realized and will add to PepsiCo’s growth rate. The company believes synergies are estimated to be $300 million per year before taxes. Coca-Cola (KO) has since followed suit with the acquisition of some of its bottling operations from Coca-Cola Enterprises (CCE).
 
PepsiCo (PEP) has a PE ratio of 15 times, below the industry average, and converts more of its revenues to profit than most of its peers (higher net and gross margins). It also has a very manageable debt level and a high return on equity at 37%. What’s more, the dividend payout ratio is only 47% of earnings, leaving a lot of room for the dividend yield to grow.
 
The company is led by Indra Nooyi, who is a true leadership superstar. Nooyi is the chief architect of PepsiCo's (PEP) multi-year growth strategy, Performance with Purpose, which is focused on delivering sustainable growth by investing in a healthier future for people and our planet. She was named President and CEO on October 1, 2006 and assumed the role of Chairman on May 2, 2007. She has directed the company's global strategy for more than a decade and led its restructuring, including the divestiture of its restaurants into the successful YUM! Brands, Inc., the acquisition of Tropicana and the merger with Quaker Oats that brought the vital Quaker and Gatorade businesses to PepsiCo (PEP) and the merger with PepsiCo's anchor bottlers.
 
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