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 one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase PepsiCo's shares before the 1st of December in order to be eligible for the dividend, which will be paid on the 6th of January.
The company's upcoming dividend is US$1.15 a share, following on from the last 12 months, when the company distributed a total of US$4.60 per share to shareholders. Looking at the last 12 months of distributions, PepsiCo has a trailing yield of approximately 2.5% on its current stock price of $184.11. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether PepsiCo can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. PepsiCo paid out 63% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 95% of its free cash flow in the form of dividends last year, which is outside the comfort zone 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. Cash is king, as they say, and were PepsiCo to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see PepsiCo earnings per share are up 9.7% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, PepsiCo has increased its dividend at approximately 8.4% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Should investors buy PepsiCo for the upcoming dividend? PepsiCo is paying out a reasonable percentage of its income and an uncomfortably high 95% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
With that in mind though, if the poor dividend characteristics of PepsiCo don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 3 warning signs for PepsiCo that we recommend you consider before investing in the business.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.
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