Here's Why We're Wary Of Buying PepsiCo's (NASDAQ:PEP) For Its Upcoming Dividend

Yahoo

4 days ago

PepsiCo, Inc. (NASDAQ:PEP) stock is about to trade ex-dividend in four days. 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 of consequence because whenever a stock is bought or sold, the trade takes at least one business day to settle. Meaning, you will need to purchase PepsiCo's shares before the 6th of June to receive the dividend, which will be paid on the 30th of June.
The company's next dividend payment will be US$1.4225 per share. Last year, in total, the company distributed US$5.42 to shareholders. Based on the last year's worth of payments, PepsiCo has a trailing yield of 4.3% on the current stock price of US$131.45. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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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. Its dividend payout ratio is 79% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 101% 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.
View our latest analysis for PepsiCo
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 encouraged by the steady growth at PepsiCo, with earnings per share up 5.5% on average 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. Since the start of our data, 10 years ago, PepsiCo has lifted its dividend by approximately 8.1% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
From a dividend perspective, should investors buy or avoid PepsiCo? PepsiCo is paying out a reasonable percentage of its income and an uncomfortably high 101% of its cash flow as dividends. At least earnings per share have been growing steadily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of PepsiCo.
Although, if you're still interested in PepsiCo and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 3 warning signs with PepsiCo and understanding them should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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