Saturday, 15 February 2014

A Look at PepsiCo


PepsiCo’s recent 15.4% dividend hike combined with the drop in share price has made it attractive.

Average Dividend Yield Analysis*

PEP:US
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2001
$50.46
$40.25
$0.14
$0.14
$0.145
$0.145
$0.57
1.42%
1.13%
2002
$53.50
$34.00
$0.145
$0.145
$0.15
$0.15
$0.59
1.74%
1.10%
2003
$48.88
$36.24
$0.15
$0.15
$0.16
$0.16
$0.62
1.71%
1.27%
2004
$55.71
$45.30
$0.16
$0.16
$0.23
$0.23
$0.78
1.72%
1.40%
2005
$60.34
$51.34
$0.23
$0.23
$0.26
$0.26
$0.98
1.91%
1.62%
2006
$65.99
$56.00
$0.26
$0.26
$0.30
$0.30
$1.12
2.00%
1.70%
2007
$79.00
$61.89
$0.30
$0.30
$0.375
$0.375
$1.35
2.18%
1.71%
2008
$79.79
$49.74
$0.375
$0.375
$0.425
$0.425
$1.60
3.22%
2.01%
2009
$64.48
$43.78
$0.425
$0.425
$0.45
$0.45
$1.75
4.00%
2.71%
2010
$68.11
$58.75
$0.45
$0.45
$0.48
$0.48
$1.86
3.17%
2.73%
2011
$71.89
$58.50
$0.48
$0.48
$0.515
$0.515
$1.99
3.40%
2.77%
2012
$73.66
$62.15
$0.515
$0.515
$0.5375
$0.5375
$2.11
3.39%
2.86%
2013
$87.06
$68.64
$0.5375
$0.5375
$0.5675
$0.5675
$2.21
3.22%
2.54%
2014


$0.5675
$0.5675
$0.6550
$0.6550
$2.45


2015


$0.6550
$0.6550
$0.6550
$0.6550
$2.62



13y ave
2.54%
1.97%

5y ave
3.43%
2.72%







3y ave
3.34%
2.72%







5y
$76.29
$96.26







3y
$78.53
$96.27






Super Cheap
$65.54


The table shows the 5 year average dividend yield to be 3.43%. I use the numbers in the “High Yield” column for obvious reasons.

Using the new annual dividend of $2.62, one would have to pay $76.29 for a 3.43% dividend yield.

Buying the stock at its low in 2009 would have earned you an initial yield of 4.0%%. Using the current annual dividend, that corresponds to a stock price of $65.54 today (see “super cheap” price in the table above).

Graham Price

PEP’s 2011, 2012 and 2013 EPS were $4.03, $3.92 and $4.32. 3Y Ave EPS = $4.09.
PEP’s BV is $14.58.
Graham Price = SQRT (3Y Ave EPS * BV * 22.5) = $36.63

Cyclically Adjusted Price to Earnings Ratio

PEP’s 10Y Ave EPS = $3.47
CAPE = Stock Price / 10Y Ave EPS = $51.90 / $2.01 = 22.5
A CAPE below 20 is good.

Conclusion

PepsiCo increased EPS from $1.47 in 2001 to $4.32 in 2013. That’s an increase of 2.9 times over 12 years. Definitely not as high as I thought it would be. Nonetheless, EPS growth is pretty steady:

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
$1.47
$1.85
$2.05
$2.41
$2.39
$3.34
$3.41
$3.21
$3.77
$3.91
$4.03
$3.92
$4.32

PepsiCo shares are overvalued when compared to Graham Price and CAPE but fairly valued when compared to Average Dividend Yield.

Although I’m overweight consumer staples, I will initiate a position in PepsiCo should the share price decline further ($75 would be nice). I’ve thought of selling Empire Company (Sobey’s) to buy PEP, but I’m still on the fence.


*My method is not perfect as the stocks low price may have occurred before the annual dividend increase.