3 things to know about PepsiCo’s dividend hike

While it surprised no one, it was still good news for investors. last week, pepsico (prototype -0.92%) As part of its annual fourth-quarter earnings update, it announced dozens of dividend increases. In fact, the payout increase marks the beverage and snack giant’s 52nd consecutive annual increase.

There are likely to be more payout increases for this dominant business in the future. However, the higher dividend reflected both good and bad news about recent operating trends. Here’s what investors need to know about Pepsi’s new quarterly cash payments.

1. slow down

Pepsi raised its annual dividend by 7% to $5.42 per share, which translates to a forward yield of 3.2%. While that raise may sound generous, it’s a slowdown from last year, when management announced a 10% raise to shareholders.

Investors won’t have to look for reasons to feel Pepsi is a little stingier in early 2024. Management said industry demand growth is slowing and sales trends will be further pressured by the expected end to inflation-based price increases.

Sales were also down 3% in the most recent quarter, meaning growth came entirely from rising prices throughout the year. All of these negative factors help explain why Pepsi expects organic sales growth of 4% in 2024. This is less than half of last year’s increase.

2. Higher profits

There is more uniformly positive news about Pepsi’s finances. The company generated $13 billion in cash from operations last year, up from $11 billion in 2022. Cost cuts are helping push this indicator higher, but so are price increases combined with the recent slowdown in commodity inflation.

TTM (Temperature to Cash) data from YCharts.

This means that while margins were under pressure in late 2022 and early 2023 when inflation peaked, the opposite is happening today. Pepsi expects revenue to grow 8% this year, roughly double the pace it expects to grow sales in 2024. This is likely a big factor in the generous dividend increase that Pepsi just announced.

3. Price and compensation

PepsiCo’s stock entered the year trading at a reasonable price, and the discount has become more attractive in recent months. For this consumer goods business, you need to pay 2.5 times your sales. This is down from a peak of more than three times sales in 2023. Add in a 3%+ dividend yield, and there are several factors that could support excellent returns for patient shareholders.

Risk-averse investors may want to watch the stock for signs that PepsiCo can continue to grow sales without significant price increases beyond 2024. Management eventually warned that demand trends are slowing back to pre-pandemic levels as inflation-based price increases provide increased sales.

On the other hand, there’s a chance for the stock to rebound as earnings margins improve, potentially setting the stage for big earnings growth (and a faster-expanding dividend) starting in 2025.

Of course, Pepsi is unlikely to achieve the nearly double-digit sales growth that investors have seen over the past three years. But revenue and cash flow are good, and organic sales are still growing at a healthy pace. That’s why investors can expect this dividend to continue growing even if the stock price remains volatile through 2024.