We are back with another dividend stock analysis. On our journey to financial freedom, we are always on the lookout for an undervalued dividend stock to buy. In today’s analysis, we are covering an ICONIC dividend growth stock that is one of the most recognizable brands out there. This article will review Pepsico (NYSE: PEP) to determine if the soda and snack giant is an undervalued dividend stock to buy!

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About Pepsi

I have always loved Pepsi. In fact, I consider the company one of my 5 Stocks to Always Buy! To provide a brief background, Pepsi was founded in 1893. That’s right, the company was founded in the 19th century! Launched as purely a soda company, Pepsi quickly began growing into a household name.

A major milestone occurred in 1965. The company acquired Frito-Lay. After the acquisition, the company was no longer just a soda company. They were now a diversified soda and snack giant. This set the course for future brand development and future acquisitions, creating one of the company’s competitive advantages over its archrival Coca-Cola (NYSE: KO). We will revisit the brands momentarily.

Now, after significant growth and acquisitions, Pepsi is one of the premier beverage and snack businesses. The company’s brands can be purchased worldwide. As one of the Top 2 in the sector, management has done a fantastic job building a moat that will generate income and cash flow for decades. As a dividend investor, that is music to my ears!

To put some numbers behind this assertion. The company released Q1 2021 results. For the quarter, revenue was $14.8 billion. Pepsi’s net income was also strong, coming in at $1.7 billion. Remember, that was just for 3 months.

Pepsi’s Brand Portfolio

Earlier in the article, I mentioned that Pepsi’s brand portfolio is what sets it apart from its competitor, Coca-Cola. The diversification, and dominance, in the soda and snack sector, provides the company with a major competitive advantage.

The chart below contains the brands for Pepsi’s beverage and snack business. Look at some of the names on the list. The company’s brand portfolio is stacked!

The beverage division contains brands such as Pepsi, Mountain Dew, Gatorade, Aquafina, Bubly, Lipton, and Tropicana. On the other side of the ring, in the snack division, you have impressive brands such as Lays, Doritos, Cheetos, Fritos, Tostitos, Ruffles, Sunchips, Quaker, Chewy, and others. Think about how many households have those brands within their refrigerators and pantries! That’s why I love this company.

How Does Pepsi Perform

Enough background talk. Now it is time to crunch the numbers. We run  Pepsi through our Dividend Stock Screener to be able to answer the following question. Is Pepsi currently an undervalued dividend stock to buy?

For this analysis, we will use Pepsi’s stock price of $145.51 (5/18/21 close). Analysts are projecting forward EPS of $6.08 per share. The company’s annual dividend is $4.30 per share. Now that we have the inputs for our analysis, let’s dive into the results.

1.) Price to Earnings Ratio: 23.93x. Pepsi is trading at a discount compared to the current stock market.

2.) Dividend Payout Ratio: 70.72%. Interestingly, the company’s payout ratio exceeds our 60% payout ratiometric.

3.) History of Increasing Dividends: Pepsi is on the doorstep of becoming a Dividend King. The company has increased its dividend for 49 consecutive years. By this time next year, Pepsi should be wearing a crown on its head!

What I love about Pepsi is the company’s strong dividend increases. This year, Pepsi announced a 5% increase in its annual dividend. Shockingly, this is lower than the company’s 5-year average dividend growth rate of 7.87%.

4.) Dividend Yield: 2.96%. Pepsi’s dividend yield is over 100 basis points higher than the broader market.

Conclusion

The results of this stock analysis are very interesting, and not exactly what I was expecting. The initial question was whether or not Pepsi is a dividend stock to buy. Leaving this analysis, am I opening up my brokerage account immediately and adding to my current position in the company?  That answer is simple…no!

First, the company’s valuation is not screaming undervaluation. Sure, Pepsi is trading at a discount to the S&P 500. Quite frankly, with a market with a valuation that high, it is hard for most companies to NOT be considered a discount to the broader market.

The interesting thing is that Pepsi’s valuation is slightly higher than the S&P 500’s historical P/E Ratio. Typically, the market’s P/E ratio is 18x – 22x.  Pepsi is cheap today; however, they are not considered cheap by historical standards.

Second, the company’s payout ratio exceeds our 60% threshold. The company’s payout ratio of 71% is higher than I would like to see. Am I concerned about the company’s overall dividend safety? No. The company still has plenty of room to go before its dividend payout ratio exceeds 100%. However, it is worth monitoring  to make sure their payout doesn’t continue to creep upward towards the “cut zone.”

Even though the company has a fantastic dividend history and a solid yield, I must pass on buying Pepsi today based on their P/E Ratio and Dividend Payout Ratio. Time to continue hunting for other undervalued dividend stocks to buy!

What do you think of Pepsi at the company’s current valuation? Are you buying shares today? Or are you going to pass and find other undervalued companies to purchase instead?