How Safe is Pepsi's Dividend?

In this video, we perform a deep dive on Pepsi’s dividend safety. To begin, let’s talk about Pepsi’s business model. PepsiCo is a global food and beverage company that had more than $63 billion in sales in 2017. The company’s products include Pepsi, Mountain Dew, Frito-Lay chips, Gatorade, Tropicana orange juice and Quaker foods. The company has 23 $1 billion brands in its portfolio. Pepsi was founded in 1898 and currently employs 264,000 people around the world. Pepsi is a well-known dividend stock because of its compelling track record of dividend growth. With 45 years of consecutive dividend increases, Pepsi is a member of the Dividend Aristocrats Index, a group of elite dividend stocks with more than 25 years of consecutive dividend increases. You can download our free list of Dividend Aristocrats here: https://www.suredividend.com/dividend... Looking ahead, Pepsi’s high dividend yield may lead some investors to question the safety of its future dividend payments. For the remainder of this video, we will discuss the company’s current dividend safety from four perspectives: 1. it’s dividend safety in the context of its current earnings 2. its dividend safety in the context of its current free cash flow 3. its dividend safety in the context of its recession performance 4. its dividend safety in the context of its current debt load Pepsi’s Dividend Safety Relative to Earnings When Pepsi reported its third quarter financial results, it provided guidance for the remainder of the fiscal year. The company now expects to generate adjusted earnings-per-share of $5.65 in the full twelve-month reporting period. For context, Pepsi currently pays a quarterly dividend of $0.9275 per share, which implies a payout ratio of just 66%. Using earnings, Pepsi’s dividend appears very safe for the foreseeable future. Pepsi’s Dividend Safety Relative to Free Cash Flow Through the first nine months of fiscal 2018, Pepsi generated $4.7 billion of cash from operating activities and spent $1.6 billion on capital expenditures for $3.1 billion of free cash flow. During the same time period, Pepsi spent $3.6 billion on common share dividends for a free cash flow payout ratio above 100%. This is clearly unsustainable over long periods of time. With that said, Pepsi’s statement of cash flows shows that this is primarily due to a significantly $1.7 billion contribution to the company’s pension and retiree medical plan. Elsewhere, the company’s dividend safety looks more appealing when measured over a longer time period. In fiscal 2017, Pepsi generated $10.0 billion of cash from operating activities and spent $3.0 billion on capital expenditures for free cash flow of approximately $7.0 billion. During the same time period, Pepsi spent $4.5 billion on common share dividends for a free cash flow dividend payout ratio of 64%. While Pepsi’s year-to-date dividends have not been covered by free cash flow, this is largely due to a one-time pension contribution. Looking over a longer time period, such as fiscal 2017, we see that the company’s free cash flow is typically sufficient to cover its dividend payments. Pepsi’s Dividend Safety Relative to Recession Performance Companies do not cut their dividends in the good times. Instead, dividends are reduced when companies experience financial difficulties. Accordingly, this section will analyze Pepsi’s current dividend safety in the context of the company’s historical recession performance. We believe that the best way to measure a company’s recession resiliency is by measuring its earnings-per-share performance during the financial crisis that occurred between 2007 and 2009. Pepsi’s performance during this time period is shown here: • 2007 adjusted earnings-per-share: $3.34 • 2008 adjusted earnings-per-share: $3.21 • 2009 adjusted earnings-per-share: $3.77 • 2010 adjusted earnings-per-share: $3.91 • 2011 adjusted earnings-per-share: $3.98 Pepsi’s earnings performed very well during the last recession. Because of this, we have no concerns about the company’s ability to pay rising dividends during future economic contractions. Pepsi’s Dividend Safety Relative to Its Current Debt Load In fiscal 2017, Pepsi generated $907 million of interest expense and had $33.8 billion of total debt for a weighted average interest rate of 2.7%. The image included in the video shows how changes to Pepsi’s weighted average interest rate would impact the company’s dividend coverage, as measured by free cash flow. As the image shows, Pepsi’s weighted average interest rate would need to rise to above the 10% level before its dividend would no longer be covered by free cash flow. Accordingly, we believe that Pepsi’s debt level is unlikely to impact the safety of its dividend moving forward.