PepsiCo: It's A Better Dividend Play Today Than You Think by Ian Bezek

Summary

Some folks are saying PepsiCo stock looks significantly overvalued.
The P/E ratio is up a bit, but the valuation is hardly extreme.
PepsiCo's dividend yield has actually been consistent from 2010 onward, you're getting paid as much now as you would have buying at the end of the financial crisis.
PepsiCo stock won't be a huge winner from current prices, but it should provide decent returns.
For long-term investors, the stock has many attractive features compared to bonds at these prices.
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I've been looking at various Coca-Cola (KO) bottling companies in recent weeks and I've found that there are some exciting opportunities. The same can definitely not be said for Coca-Cola stock itself. Despite rather underwhelming operating results in recent years, Coca-Cola is now up to 30x trailing earnings and 25x forward earnings. Additionally, I'm far from convinced that the $5 billion Costa Coffee acquisition was a great move, and aside from that Coca-Cola isn't brimming with big growth opportunities.

That said, in doing my work on the soft drink space, I was surprised to see that PepsiCo (PEP) really hasn't run up that much despite the big moves elsewhere in the sector. Sure, PEP stock is up this year, but it's still had a pretty subdued performance when you zoom out a bit. It's not that hard to make the case that PepsiCo stock will at least match the S&P 500 in returns going forward, if not topping it to a degree while taking much less risk.

Data by YCharts

Since the early 2018 lows, as you can see, PepsiCo has traded virtually tick for tick with Coca-Cola and both of those shares have merely matched the S&P 500. They both trail the more trendy consumer staple plays of the moment, such as Procter & Gamble (PG), that are up 50% over the same stretch.

And thus, even with all the talk of PepsiCo stock being significantly overvalued, it's still not a bad stock to buy if conservative income is your priority. I offer this article as a bit of a friendly counterpoint to my fellow author Nicholas Ward's recent suggestion that PepsiCo Is Very Expensive, in which he suggested shares were 25% overpriced. I'd argue PepsiCo stock is not unreasonably priced here at $133 and any dip down to the $120 area would make it well worth picking up. And a 25% decline, if in fact, it happened, would take PEP stock to $100 and make it an absolute steal in this market.

To give credit where it is due, since Ward's September 17th article, Pepsi stock has underperformed the S&P 500 by about five percent, which backs up the idea that PEP stock was indeed getting ahead of itself in the short-run. It's not hard to see why, either. With interest rates now turning higher again, the rush into dividend stocks for yield has stopped for the time being.

If you think interest rates have bottomed and we'll be talking about inflation and rate hikes again going forward, then that may have been about as good as it gets for PEP stock for the time being. If you buy the view that interest rates are likely to remain relatively low in the coming years, however, I don't think the current PepsiCo share price is all that unreasonable.

As Ward notes, PepsiCo, like many such consumer staples stocks, is an absolute cash flow titan. In 2019 alone, the company is returning roughly $8 billion to shareholders, with the majority of that coming via dividends and a smaller portion through the share buyback. Even if you assume no growth - rather than slow growth - PepsiCo stock still crushes an average long-term government bond fund (orange line) in this environment.

Data by YCharts

Going back to the financial crisis, PEP stock always yields about 3%. Sometimes it goes a few basis points over that, sometimes the yield drops to 2.5%, but it's always in that ballpark. Meanwhile, over the same stretch, the yield on long-term government treasuries has gotten slammed, falling from as high as 4.2% to just 2.3% now.

Now let's look at the comparison with chief rival Coca-Cola:

...Originally Posted On Seeking Alpha

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