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PepsiCo stock: is PEP reign as dividend king under threat in recession hit economy?

By Jenny McCall

11:03, 18 November 2022

A image of PepsiCo bottle
Will PepsiCo remain dividend king during the current economic crisis? - Photo: Getty Images.

The words dividend and king are rarely said these days in the same sentence, as companies grapple with cost cuts and recession woes. But consumer goods group PepsiCo (PEP) announced an increase to its dividend on Thursday and it’s the third time this year the producer of Pepsi, Lay's, Quaker and 7UP, has increased its dividend.

But as the world economy struggles through a recession and high inflation, is PepsiCo (PEP) reign under threat?

PEP share price has been up by 4% over the last four weeks and 3% this year. Yesterday PEP raised its dividend for the third time this year. The board declared a quarterly dividend of $1.15 per share of PepsiCo common stock, representing a 7% increase versus the same period last year.

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PepsiCo (PEP) share price chart

Is PEP reign as dividend king coming to an end? 

“This dividend is payable on January 6, 2023, to shareholders of record at the close of business on December 2, 2022. PepsiCo (PEP) has paid consecutive quarterly cash dividends since 1965, and 2022 marked the company's 50th consecutive annual dividend increase,” a PepsiCo statement said.

And PEP is not wrong.

The PepsiCo (PEP) dividend increase has been going for five decades and through good times and bad times, the PepsiCo dividend increase has remained strong.

“The company increased its dividend 5 times in the past 5 years, and its pay-out has grown 6.53% over the same time. PEP's pay-out ratio currently sits at 69% of earnings,” analysts at Zacks research wrote in a note.

Some experts might say that this is proof that a company can sustain and grow dividend payments even with a myriad of challenges at its door.

But could recession woes and economy lows threaten PEP’s reign as dividend king?

Well, some analysts believe that PEP is a stock that could shelter an investor against this current volatility.

Derren Nathan, Head of Equity Research wrote in a note: “PepsiCo’s flagship cola is truly a giant among iconic brands which include a huge range of food and beverage household names like Walkers Crisps, Quaker Oats and Tropicana. Growth in excess of that of the economy seems hard to come by, but the group’s expecting 12% underlying revenue growth this year following a recent upgrade. Its diversity in terms of brands is also matched by its wide geographical reach. It’s a true global player,”

“Pepsi very much as a long-term investment with the potential to generate relatively stable returns, rather than spectacular growth. And with that, comes some shelter against volatility.”

So, it seems the simple things in life, a packet of crisps and can of pop can help provide comfort during times of stress and PEP may be reaping the benefits of this. Thriving against the backdrop of declining consumer spending, PEP appears to be on an upward trajectory.

Consumers are purchasing PEP produce, despite its price increases.

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It’s net revenues in its third-quarter earnings were 8.8% higher year-on-year to $21.9bn versus $20.8bn forecast by analysts. PEP also beat analysts’ forecasts of $1.85 per share and its adjusted earnings per share were $1.97.

PepsiCo even increased its forecast and upgraded its previous guidance of 10% to 12% for organic sales growth and has upgraded earnings per share growth from 8% to 10%.

Not bad for a fizzy drink brand.

 

Will PEP survive a recession KO better than Coca-Cola? 

But despite PEP stock rising over the last four weeks by 4% which is good, its not as good as its competitors, such as Coca Cola (KO), whose share price has risen by 9% for the same period.

However, KO has more market share in what is called away-from-home channels. These include theme parks, cinemas, and restaurants - relationships it has spent decades cultivating - and in times of recession, having exposure to these outlets could prove to negatively affect as households stop dining out, going to watch movies or visiting theme parks.

PepsiCo (PEP) has less exposure to these channels, and this was demonstrated during the pandemic, when PepsiCo’s sales rose by 4.8%, versus KO’s, which decreased by 11%.

But PEP is not out of the woods just yet.

Consumer confidence is declining, as energy prices surge, alongside food and heating, which are all eating into household budgets. If PEP stock price starts to decline, this could threaten its dividend pay-out.

Coca Cola (KO) share price chart

How low can PEP stock go?

Trefis data shows: “With the fed raising interest rates, PEP stock has lost -29%. As a comparison, it lost -42% and -13% during 2008 Financial Crisis and 2020 Covid Crisis respectively.”

“While the decline this year has lasted 35 days, it took PepsiCo 424 and 25 days to reach bottom in the previous two crashes. The stock took 50 months to recover post 2008 Financial Crisis, and 3-month post Covid Crisis.”

PEP stock appears to be a haven for investors but with the economic challenges remaining, it’s hard to know for sure if it will remain as dividend king over the coming months and into next year.

Markets in this article

PEP
Pepsi
172.60 USD
2.75 +1.620%
KO
Coca-Cola Co (Extended Hours)
65.65 USD
0.33 +0.510%

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