Pepsi pays one of the more attractive dividends in the beverage space, with a yield around 3%. The company’s annual dividend has increased for more than 40 years in a row, and its payout ratio has averaged about 60% over the last decade, which has translated to high-single-digit dividend growth. We expect Pepsi’s commitment to returning cash to shareholders to continue over our forecast and anticipate an average payout ratio in the mid-60s over the next 10 years.
In our view, Pepsi’s wide moat should ensure the company continues to return excess cash to shareholders over the long term. The company has 22 brands in the beverage and snack categories that generate above US$1 billion in annual sales, allowing it to form entrenched relationships with retailers that depend on leading brands to drive store traffic and inventory turnover. Pepsi’s substantial investments in advertising and research and development, which totalled nearly US$5 billion or more than 7% of sales last year, should support these brands over time, and help the firm defend its share from competition.
We surmise the combination of Pepsi’s food and beverage businesses has also created an advantaged cost structure, given synergies in shipping and promoting its offerings. We expect strengthening profitability as higher-margin products, like premium beverages, snacks for more health-conscious consumers, and smaller pack sizes, continue to grow and the firm’s efforts to drive cost savings yield further benefits.
In addition to the attractive dividend yield, shares are currently trading at more than a 10% discount to our valuation, which could provide a favorable entry point for investors.
