Finding cheap or fairly priced high-quality company with consistent earnings and free cash flow in an 8-year bull market isn’t the easiest task. The S&P500 Index currently trades at a forward P/E ratio is projected to be around 16.5 by December 31, 2019, which is lower than what we had in January 2018, when the Forward P/E was 18.2, but still far above the 10-year average at 14.3. Naturally, this has caused most companies to trade at high multiples which again decreased the forward return investors can earn by buying equites.
The 10-year treasury yield is pushing dividend stocks down
The 10-year treasury yield is still in the 3% area, which means that dividend stocks needs to offer a better yield (at least total return) than mere 3%. If not, there is little to no point taking external risk when you can buy bonds at a significant lower risk of losing your capital.
Looking for quality among the dividend aristocrats
Luckily, the increased bond yield has also caused some very high-quality companies to trade at attractive prices. Often, it’s smart to look at established companies that has proven to be survivors in almost any economic climate. We can find many of those companies in the Dividend Aristocrats, a list of companies that has paid uninterrupted dividend payments for more than 25 years. Now, there is one company among the list which stands out as a great long-term value play.
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PepsiCo (NYSE: PEP)
PepsiCo is an established dividend aristocrat which has paid uninterrupted dividends for more than 25 years and the 10-year compounded annual growth rate (CAGR) has been solid at 10%. During the last year, the CAGR has decreased a bit and is now sporting a 7% CAGR. For a mega cap with over $154 billion market cap and a yield at 3.43%, which is 22% above it’s 5 year average, investors should still expect excellent long-term returns from this high quality company.
While most market participants would do much better looking for companies with stable earnings instead of binary bests, it’s still important to acknowledge that valuation matters. In so, we shall take a look at the PepsiCo’s liabilities, profitability and market ratios.
Liabilities refers to how much money the company owns. Here, the most interesting ratio is debt to equity which states how much debt the company has compared to how much equity they have. For PepsiCo, this number is 4. That’s a high number, however, when we take the Net Debt to EBIDTA, we find a ratio at 2.32 which states that PepsiCo would use 2.3 years to pay of all debt should they choose to. In so, debt to equity seems reasonable and safe.
The current ratio, which shows long-term and short-term debt, is healthy above 1. The quick ratio, which shows the pressing liabilities is also healthy at a ratio at 1.10.
In total, PepsiCo’s liabilities seem under control.
Buying profitable companies is a sound and wise way to make money. PepsiCo has been and still is a cash machine. The company has a very high return on equity at 40.70% which shows that they are able to create high shareholder value with the equity investors has given the management. The other ratios, such as ROA and ROI are also double digit and above the minimum level at 8%.
In total, PepsiCo is still a very profitable company
The most interesting market ratio is the price to earnings ratio and PepsiCo’s forward P/E ratio is 17.76. That’s a bit higher than S&P500 ratio at 16.2, but still lower than PepsiCo’s usual ratio.
Analyst operate with a target price at $115.91 which means that PepsiCo trades at a 6.4% discount to the mean, and a 20% discount to the highest target price at $130. Being able to buy a high-quality dividend aristocrat under fair value is something investors should take notice of. We believe PepsiCo will create great long-term returns for investors buying shares today.
Disclaimer: The author owns shares in PepsiCo.