Key Points
PepsiCo generated just 3% organic growth in its most recent quarter.
It also slashed its forecast for earnings growth this year.
The company's payout ratio, however, is still around 70%.
PepsiCo (NASDAQ:PEP) has been a top dividend stock to own for decades. It's been growing its payout and offering investors some great value. But the business hasn't been in great shape of late, and recently it cut its guidance.
Its yield is fairly high at around 4.7%, as the stock has fallen by more than 15% in the past 12 months. With the company facing some greater adversity these days, can investors still depend on its dividend for the long haul, or is it in danger of being cut?
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The company is facing challenges
PepsiCo's business has been growing this year, but it has been at a fairly modest rate. Revenue in its most recent quarter, which ended on Sept. 5, totaled $25.3 billion and was up nearly 6% year over year. But organically, its top line grew by just 3%. Its core earnings per share (EPS) also only rose by a modest 2%.
The company was previously expecting between 5% to 7% growth in core EPS for the full year, but has now reduced that to a range of 2.5% to 3.5%.
With the business making investments into its operations to improve performance and strengthen its future growth, that can adversely impact cash flow, which in turn, may put pressure on the company's dividend.
PepsiCo raised its dividend again this year
In May, PepsiCo announced a 4% increase to its dividend, boosting it to $1.48 per share each quarter, or $5.92 over the course of a full year. Currently, its payout ratio is at around 70%, which is a healthy rate, suggesting that not only is the dividend safe, but there is room for more increases in the future, even if its growth rate is modest.
PepsiCo is a Dividend King, as it has raised its dividend for 54 consecutive years. While that kind of track record does suggest safety, past performance is not a predictor of the future, and things can change. The good news for investors is that even amid adversity, the dividend still looks safe right now.
Is PepsiCo stock a bargain buy right now?
As a result of the decline in its share price, investors can buy PepsiCo's stock at a discount right now. It's currently trading at a forward price-to-earnings multiple of just under 15, which is based on analyst expectations of how it will do in the year ahead. That's far below the S&P 500 average of 20.
For income investors, this can be a potentially underrated dividend stock to buy right now, with PepsiCo having a tremendous track record for dividend growth. Its business is facing challenges, but it is still growing. As a long-term investment, PepsiCo could make for a good buy today.
David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.