Week #5PEP
Stock of the Week #5 — PepsiCo (PEP)
88Five-box test: ✓ Pays · ✓ Raises · ✓ Safe · ✓ Undervalued · ✓ Yield that matters
Week five, another $100, and this week we're buying something that's probably in your kitchen right now.
So far we've bought a rural-goods retailer (Tractor Supply), a medical-device maker (Medtronic), a monthly-paying landlord (Realty Income), and an electric utility (NextEra). This week we add a fifth kind of business, and the most defensive one yet: consumer staples. PepsiCo (PEP) makes Pepsi, Gatorade, Mountain Dew, Lay's, Doritos, Cheetos, and Quaker. People buy those in a boom and they buy them in a recession, which is exactly the kind of steady, all-weather cash we want anchoring a family portfolio.
Why PepsiCo
PepsiCo is a 54-year Dividend King. It has raised its dividend every single year for 54 years and paid one without a cut for 61, straight through every recession, oil shock, and market crash in living memory. You do not get a streak like that by accident. It takes a business that sells a little bit to almost everybody, every single day, in good times and bad.
Right now the market doesn't love it. The stock trades near a decade-high yield of about 4.3%, dragged down by worries about weight-loss drugs denting snack demand and by heavy spending overseas. We think those fears are real but overblown for a company this durable, and the price tag reflects them: PepsiCo yields well above its own recent norm, which is our favorite time to buy a great business. It's also the fifth distinct economic engine under the portfolio. Snacks and soda rise and fall for entirely different reasons than rural retail, medical devices, commercial real estate, or electricity, and that's how a portfolio gets sturdier.
The five boxes
- Pays — yes, 61 years without a cut.
- Raises — 54 straight years of increases. A Dividend King.
- Safe — about 78% of earnings paid out. A comfortable level for a business this steady, and this is where the interesting part is (below).
- Undervalued — today's yield sits about 29% above its own 5-year median, so it's meaningfully cheaper than usual.
- Yield that matters — about 4.3%, the highest of anything we own except Realty Income.
Five boxes, five checks, for a DividendAbundance Score of 88 — Strong.
The honest part (this one's a good one)
Here is something we want to show you plainly, because it's exactly the kind of thing most sites would quietly paper over.
A month ago we prepped PepsiCo as a candidate, and on that day our own score gave it an 84, with an ugly 4 out of 20 on the safety box. The reason: PepsiCo's most recent year of earnings had been knocked down by one-time write-downs on some of its brands, which pushed the payout ratio over 90% on paper. On the company's normal earnings it was closer to 70%, but our rule is to score the plain, reported number for every stock, no cherry-picking. So an 84 with a 4/20 asterisk is what we had written up.
Then two things happened. Our rule says re-verify the numbers on the actual buy day, because they move. And on July 9, PepsiCo reported a fresh quarter of earnings. That new quarter pushed the old write-down quarter out of the rolling twelve-month window we measure. With the one-time charge gone, reported earnings jumped back up, and the payout ratio fell from about 93% to about 78%. The safety box went from 4 to 8, and the score went from 84 to 88.
We could have just published the 84 we had in the drawer. Instead we re-checked, the picture had genuinely improved, and we're showing you both numbers and the reason the score moved. That's the whole point of doing this in the open.
One honest knock remains. PepsiCo's dividend growth has slowed to about 4% a year lately, down from its roughly 7% long-run pace. That's slower than several names we own, so we plan our income projections on the honest 4%, not the flattering 7%. A 54-year King raising 4% a year is still a wonderful thing to own for decades. We're just not going to pretend it's a fast grower.
The numbers on this week's $100
- Invested: $100.00
- Bought: 0.7193 shares at $139.01
- New annual dividend income added: about $4.26 per year
- Every dividend it pays flows straight into next week's pick, so the income keeps building between our buys.
Five weeks in, five very different businesses, and an income stream that grows a little every month. The running totals are on the portfolio page, and the home-page slider lets you drag through time, and toggle to monthly, to watch it compound.
That's week five. We bought PepsiCo, we're holding it, and we'll see you next week with pick number six.
This is not financial advice. We're individual investors sharing our own approach and the reasoning behind our own real decisions, not licensed advisors. We own, or are buying, the stocks we write about in this series. Do your own research and consider speaking with a financial professional before investing. Dividend figures, yields, share counts, and prices are accurate to the best of our knowledge as of the publish date and will change over time.