Yahoo Finance Don't Race Out To Buy PepsiCo, Inc. (NASDAQ:PEP) Just Because It's Going Ex-Dividend
Readers hoping to buy PepsiCo, Inc. (NASDAQ:PEP) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase PepsiCo's shares before the 7th of June in order to be eligible for the dividend, which will be paid on the 28th of June.
The company's next dividend payment will be US$1.355 per share. Last year, in total, the company distributed US$5.42 to shareholders. Calculating the last year's worth of payments shows that PepsiCo has a trailing yield of 3.1% on the current share price of US$172.90. If you buy this business for its dividend, you should have an idea of whether PepsiCo's dividend is reliable and sustainable. So we need to investigate whether PepsiCo can afford its dividend, and if the dividend could grow.
See our latest analysis for PepsiCo
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 76% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether PepsiCo generated enough free cash flow to afford its dividend. The company paid out 94% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
While PepsiCo's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to PepsiCo's ability to maintain its dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by PepsiCo's 5.5% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. PepsiCo has delivered 9.1% dividend growth per year on average over the past 10 years. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
The Bottom Line
Is PepsiCo an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think PepsiCo is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with PepsiCo. Our analysis shows 3 warning signs for PepsiCo and you should be aware of them before buying any shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
