PepsiCo (PEP) Hits New Highs on Investors' Optimism

Global food and beverage company, PepsiCo (NYSE:PEP) is having a great year so far. Earlier this week its stock reached $114 per share for the first time in history. A recent public relations setback may have caused some investors to worry. Pepsi showed a commercial featuring Kendall Jenner resolving a protest by giving everyone cans of Pepsi to drink. Jenner is an American fashion model and television personality, famous for appearing in the reality TV show, Keeping Up with the Kardashians. PepsiCo pulled the ad soon after it was released. Pepsi apologized saying “we did not intend to make light of any serious issue,” after many people on the internet criticized the ad for being too tone deaf. But despite the social media backlash PEP stock seems to continue its trend upwards. As the common saying goes, “there’s no such thing as bad publicity.”

One aspect of PEP that attracts long term investors is its dividends. There are various forms of dividends, such as cash payment, stocks, etc. This payment is usually a part of the profit of the company. PepsiCo’s dividend has been increasing every year. The long term dividend growth history means that patient shareholders who have held the company for many years have been greatly rewarded. The company recently announced a dividend growth of 7% for the first quarter of 2017, representing 45 consecutive years of dividend growth, which is quite impressive. In Fiscal 2017, its total dividend payments will likely be around $4.5 billion. PepsiCo expects to have about $10 billion in operating cash flow and $7 billion in free cash flow this year. Therefore, the company’s dividends should be safe.

In terms of valuation however, PEP does not seem to be very cheap at this time. It is currently trading at 26 times earnings (P/E ratio), which is what you can normally expect for a faster growing company. Unfortunately PepsiCo’s top line as well as bottom line is not expanding at a high rate anymore. It certainly still is a solid performer, and will probably continue to grow sales and net earnings over time. But the recent quarterly report wasn’t particularly outstanding and guidance for the rest of the year doesn’t have anything to be get excited about. The main reason for the stock appreciation this year is due to P/E expansion. In other words, investors are feeling more confident about the stock market in general which pushes up valuations for all companies. Although PEP stock seems expensive by historical measures, it is still relatively cheap compared to its competitor, the Coca-Cola company (NYSE:KO) which has a price to earnings ratio of 29 times. The two companies are about the same size in market capitalization.

At this time it looks like both Pepsi and Coca-Cola are too expensive to get in. However, for investors who already own either stock, it is probably better to hold them. Both are known for growing dividends every year. Even if the stock price doesn’t appreciate in the near future at least investors will be rewarded with a steady stream of dividends. The yield is about 2.7% for PEP, and 3.4% for KO.

PepsiCo was formed in 1965 with the merger of the Pepsi-Cola Company and Frito-Lay, Inc., which produces potato chips. PepsiCo has since expanded from its namesake product Pepsi to a broader range of food and beverage brands, the largest of which includes an acquisition of Tropicana Products in 1998 and the Quaker Oats Company in 2001. Many sports drinks including the Gatorade brand also belongs to the PepsiCo family.

This author does not have any shares in PEP or KO and does not plan to own any of either within 72 hours of this post.