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Readers hoping to buy PepsiCo, Inc. (NASDAQ:PEP) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, PepsiCo investors that purchase the stock on or after the 6th of December will not receive the dividend, which will be paid on the 6th of January.
The company's next dividend payment will be US$1.355 per share, on the back of last year when the company paid a total of US$5.42 to shareholders. Last year's total dividend payments show that PepsiCo has a trailing yield of 3.3% on the current share price of US$163.45. If you buy this business for its dividend, you should have an idea of whether PepsiCo's dividend is reliable and sustainable. So we need to investigate whether PepsiCo can afford its dividend, and if the dividend could grow.
View our latest analysis for PepsiCo
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Its dividend payout ratio is 77% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether PepsiCo generated enough free cash flow to afford its dividend. PepsiCo paid out more free cash flow than it generated - 115%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
While PepsiCo's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to PepsiCo's ability to maintain its dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. PepsiCo's earnings per share have fallen at approximately 5.3% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.