• PepsiCo spends about $4 billion a year on marketing and advertising
• See all 22 of the company’s $1 billion+ brands
• PepsiCo’s dividend and growth analyzed for long-term investors

PepsiCo (PEP) recently increased its dividend payments 15% and released its full year 2014 results and 2015 outlook. The company saw adjusted constant-currency earnings-per-share grow at 9% in full 2014. In total, PepsiCo spent $8.7 billion in 2014 on dividend payments and share repurchases. The infographic below shows relevant facts and figures from PepsiCo’s 2014 in an easy-to-read formant:

Click on picture to enlarge

Source:  PepsiCo Investor Relations

2014 Growth Drivers

PepsiCo’s operations are split into 6 reporting segments. Each segment’s 2014 volume growth is shown below for both snacks and beverages (when applicable).

2015 OutlookThe table above shows that PepsiCo is seeing slow volume growth throughout North & South America and Europe.  The country is seeing its fastest growth in snacks in the AMEA segment. AMEA snack volume grew 8% for PepsiCo in 2014, 4x as fast as any other category.  Emerging market snack sales are currently PepsiCo’s biggest growth driver.

PepsiCo is expecting 7% constant-currency core earnings-per-share growth in fiscal 2015. PepsiCo has a history of understating its growth. In 2013, the company expected constant-currency core earnings-per-share growth of 7% as well. Instead, the company generated 9% constant-currency core earnings-per-share growth in 2014.

Over the last decade, PepsiCo has managed to grow its revenue per share and dividends per share at around 9% a year. I believe the company will continue to grow at around 9% a year based on its 2015 guidance (which is likely understated).

22 Billion Dollar+ Brands

PepsiCo has 22 brands that generate over $1 billion per year in sales. These brands can be divided into 3 categories: carbonated beverages, non-carbonated beverages, and snacks. The table below lists each of PepsiCo’s 22 billion dollar brands by category.

$4 Billion Annual Marketing SpendPepsiCo also owns several ‘health’ brands including SoBe life water, Stacy’s pita chips, and Naked juice.  The company currently generates about 50% of revenue from snacks and food and 50% from beverages. As the table above shows, PepsiCo controls some of the most recognizable snack and beverage brands in the world. As an aside, PepsiCo partners with Starbucks to sell the Starbucks brand RTD coffee beverages seen at grocery stores and gas stations. PepsiCo does not own Starbucks.

PepsiCo has not released its 2014 Annual Report as of this writing. The company’s  2013 Annual Report shows advertising and marketing expenses of 5.9% of revenue, or $3.9 billion. PepsiCo very likely spent around 6% of revenue on marketing and advertising in fiscal 2014 which comes to $4 billion on marketing. The company will probably spend a similar dollar value on marketing in fiscal 2015.

PepsiCo’s strong cash flows allow it to invest heavily in advertising and marketing. The company can outspend smaller rivals and build mass audience brand awareness. This drives sales for the company, making it even larger. The larger PepsiCo grows, the more it can spend on advertising.  PepsiCo will likely continue to grow as long as consumers respond, either consciously or unconsciously, to advertising.  I don’t believe our reaction to advertising and marketing will change any time soon; PepsiCo has a strong competitive and years of growth ahead thanks to its diversified product offerings and strong advertising and marketing spending.

Dividend Analysis

PepsiCo currently has a dividend yield of 2.6%. The company’s recent 15% dividend hike shows it is committed to continued dividend increases.  PepsiCo is no stranger to rising dividends. The company has increased its dividend payments for 43 consecutive years, making PepsiCo a Dividend Aristocrat.

PepsiCo’s dividend yield of 2.6% is 0.7 percentage points higher than the S&P 500’s dividend yield of 1.9%. PepsiCo’s solid dividend yield is also a full percentage point higher than the Dividend Aristocrat Index’s current dividend yield of 1.6%. Dividend stock investors seeking growth will find both an above-average starting yield and above-average growth by investing in PepsiCo.

The 8 Rules of Dividend Investing Ranking

PepsiCo has long been a favorite of The 8 Rules of Dividend Investing. Despite the company’s recent run-up in price, it still ranks in the top 20 out of over 150 businesses with 25+ years of dividend payments without a reduction in the Sure Dividend database. The company has the following characteristics using the 5 buy rules from The 8 Rules of Dividend Investing:

• 43 consecutive years of dividend increases (passes rule 1)
• 6% dividend yield is ranked 72nd highest out of 153
• 57% payout ratio is ranked 100th lowest out of 153
• 6% 10-year growth rate is ranked 17th out of 153
• 3% 10-year stock price standard deviation is ranked 5th out of 153

PepsiCo ranks highly thanks to its relatively high growth rate and low stock price standard deviation. The company is an example of a ‘low risk dividend growth stock’ thanks to its strong brands and low stock price standard deviation coupled with its 9.6% long-term growth rate. PepsiCo has a slightly above average dividend yield rank. The company’s payout ratio is higher than average, but is still conservative given the company’s stable cash flows.

Final Thoughts

PepsiCo is clearly a high quality business. The company has a strong competitive advantage that stems from its well-managed brands. PepsiCo supports its brands through multi-billion dollar advertising budgets and product innovation. The company controls a large share of shelf space at most grocery chains, gas stations, and convenience stores across the U.S. (and globally).

PepsiCo is positioned for future growth due to the popularity of its snack brands in emerging markets. The company will likely continue to grow shareholder value around 9% a year while paying out a 2.6% dividend yield for total shareholder returns of 11.6% a year, before any valuation multiple changes.

The one downside to PepsiCo stock is its valuation. The stock is not excessively valued, but its price-to-earnings ratio of 21.6 is higher than its historical average. PepsiCo is currently trading at a ~10% premium to the overall S&P 500, which makes sense given its solid growth and low-risk. The stock may be a buy for long-term investors, and is certainly a hold at current prices.