PepsiCo: 7% Dividend Increase amid Inflationary Pressures

While growth stocks continue to remain volatile, investors are turning to the safety of reliable dividend-paying stocks; Stocks that have decades of proven reliability and that are well positioned to perform regardless of the economic environment.

One such stock is PepsiCo (PEP), which delivered strong quarterly results and has effectively joined a very exclusive dividend club. In this environment, I remain neutral to slightly bullish on the company.

One of the most well-known global brands, Pepsi is one of the largest soft drink companies in the world. However, what some may not know is that Pepsi is far more than just a beverage company. It also has two other major segments, including Frito Lay and Quaker Oats, and it is also the parent company of Gatorade.

Fiscal Q4 Results

Recently, the company posted strong Fiscal 2021 Q4 results in which it beat on both the top and bottom lines. Earnings of $1.53 beat by a penny, while revenue of $25.25 billion beat by $1.01 billion. For a company the size of PepsiCo, beating on revenue by more than a billion is an impressive result.

The beat was in large part thanks to strong organic growth, which increased by 11.9% year over year. The Frito-Lay North America (+13%), Latin America (+17%), and PepsiCo Beverages North America (+12%) segments all led the way with double-digit growth.

On the flip side, operating profit actually declined 10% year-over-year in the Beverages North America segment as inflationary pressures are beginning to set in. Management pointed to higher commodity costs and higher transportation and advertising costs as the key factors. Notably, commodity input costs rose by 37%.

Inflationary Pressures

While inflation is a concern, the good news is that companies like PepsiCo can offset these costs with price increases. While it likely won’t offset the entirety of costs, they do have the ability to offset inflationary costs – to an extent.

It is worth noting that this past week, Frito Lay Canada has stopped shipping products to Loblaws, the largest grocery chain in Canada. Why? There is currently an ongoing pricing dispute between the two companies. Loblaw (TSE:L) has effectively balked at the price increases proposed by Frito Lay.

This will be a development worth watching, and having a manufacturer stop shipping to grocers is considered a ‘nuclear’ option. Given this dispute, it is apparent that inflationary pressures will be a challenge for PepsiCo in the short-to-medium term.

For Fiscal 2022, the company expects to achieve 6% organic revenue growth and return total cash returns to shareholders of $7.7 billion. This comprises dividends of $6.2 billion and share repurchases of $1.5 billion. Finally, it expects earnings per share of $6.67, which was slightly lower than analysts’ average estimates of $6.72 per share.

Dividend King

Ending on a positive note, PepsiCo also announced its annual dividend increase this past quarter. The company announced a 7% increase to the dividend, which will increase from $4.30 to $4.60 per share on an annual basis.

The raise is a notable one as it represents the 50th in company history. This means that it will effectively achieve Dividend King status, reflective of companies that have achieved 50+ consecutive years of dividend growth.

Wall Street’s Take

From Wall Street analysts, PepsiCo earns a Moderate Buy consensus rating based on seven Buys and seven Hold ratings assigned in the past three months.

The average PepsiCo price target of $180.79 puts the upside potential at 8%.

Conclusion

Overall, Pepsi offers stability in these times of uncertainty. However, it is not without headwinds, and current inflationary pressures will impact margins. Despite this, I remain cautiously optimistic that PepsiCo has enough brand pricing power to help mitigate these inflationary headwinds.

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