Will PepsiCo Hike Its Dividend Soon? - Looks Likely - Value Investors Love the Stock

PepsiCo Inc. (PEP) will likely announce an annual dividend per share (DPS) hike in early February. Based on its historical average dividend yield and average P/E ratio, PEP stock now looks undervalued. This makes it interesting to value investors.

PEP closed at $149.12 on Friday, Jan. 24, just off its recent low of $142.64 on Jan. 10. However, in the last three months it has dropped over 18% from $174.37 on Oct. 22.

There doesn't seem to be any good reason for this, especially given PepsiCo's strong free cash flow. 

As a result, PEP stock could be undervalued. This article will delve into this to estimate its underlying value.

Likely Upcoming Dividend Hike Announcement

Consider this. Last year on Feb. 7, PepsiCo announced that it would raise its dividend per share (DPS) by 7% to $1.36 quarterly ($5.44 annually). This was even though this hike would not take effect until June 2024. 

So far PepsiCo has only made three quarterly $1.36 DPS payments. It still has yet to officially declare and make the fourth quarterly $1.36 DPS payment.

However, given the precedent from last year, investors now anticipate there could be a new DPS hike announcement for 2025. This could be during its upcoming Q4 earnings release.

Nevertheless, it would not take effect until after the upcoming fourth quarterly DPS payment. 

PepsiCo is set to announce its Q4 earnings on Feb. 4. before the market opens on that Tuesday morning. That is just over 1 week away from today. 

In effect, PEP stock could start to trade as if the expected new dividend hike is coming soon. So, we can forecast how this will affect the PEP stock price.

Strong Free Cash Flow Expected

Last quarter (Q3 2024) PepsiCo said its organic revenue rose 1.3% in Q3 and is up 1.9% YTD. However, its cash flow is significantly lower YTD than last year. After higher capex spending, its free cash flow (FCF) is about 34% lower at $3.37 billion YTD. 

However, that appears to be a one-off issue related to its working capital (it lowered its accounts payable). After adjusting for this it was only down by 5.3%.

Its operating cash flow (OCF) before this one-off increase was still strong at $7.673 billion YTD. In addition, PepsiCo said on page 4 of its earnings release it expects to make $7.2 billion in dividend payments this year. 

So, it has plenty of cash flow to increase the dividend in 2025. After all, it has done this for the past 52 years. This year's hike would make it the 53rd time the DPS has risen.

Let's assume that PepsiCo raises the DPS by 6.0% (slightly less than last year's 7% hike) to $5.76 (i.e., $1.44 quarterly), up from $5.44 annually this past year.

What would happen to PEP stock price?

Historical Dividend Yield and P/E Metrics

Morningstar reports that the average dividend yield over the last 5 years for PEP stock has been 2.76%. This is similar to Seeking Alpha's 4-year average yield of 2.77% and Yahoo! Finance's 5-year historical yield of 2.78%. So, these average at 2.77%. 

However, right now PEP stock has a higher dividend yield:

$5.44 DPS / $149.12 = 0.03648 = 3.65%

Therefore, if PepsiCo hikes the annual DPS by 6.0% to $5.76 annually, here is what PEP stock would be worth:

$5.76 / 0.0277 (avg yield) = $207.95 per share

That is over +39.5% higher than today's price.

Moreover, PEP stock is also trading well below its average earnings metrics. For example, Morningstar reports that its average forward price/earnings (P/E) multiple is 22.87x over the last 5 years. Yahoo! Finance says its current forward P/E is just 17.3x.

That implies the stock could rise by 32% (i.e., 22.87x / 17.3x - 1 = 1.3219). That would give it a target price of $197.13 per share.

For example, analysts at Seeking Alpha project $8.54 in earnings per share (EPS) this year, up from an expected EPS of $8.15 in 2024. Using a 22.87 multiple, PEP's target price would be:

$8.54 x 22.87 = $195.31 per share

So, on average, using price targets from historical dividend yield ($207.95), forward P/E ($197.13), and analysts' EPS estimates ($195.31), the average target price is $200.13. That is +34% higher than Friday's price.

Analysts Agree PEP Stock is Cheap

Analysts agree that PEP looks cheap here. Several sites follow analysts' recommendations.

For example, Yahoo! Finance says the average price target from 23 analysts is $174.35 per share. Similarly, Barchart says the mean analyst price is $176.24, with a high of $200 per share. That puts the average price target at about $175.00. Moreover, AnaChart reports that 18 analysts have a price target of $169.35.

This shows that analysts see PEP stock at least 14.7% undervalued based on the average analyst price target.

However, once PepsiCo announces a dividend hike in just over a week, analysts will likely raise their price targets.

Summary

Value investors like PEP stock now as it looks undervalued. After all, the dividend is likely to rise, as it has for the past 52 years. PEP stock does not reflect its average yield and forward P/E metrics.

The bottom line is that PepsiCo looks likely to rise over the next 12 months, and possibly much sooner, based on these metrics.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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