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Is Pepsi Stock a Good Retirement Investment?

Question: I already have and investment in PepsiCo and am thinking of adding money to it. I am a senior and still employed, but with the CD’s at such a low rate, I thought dividend-plus-growth would be the way to go.  Am I correct?

Answer: Let’s assume you’re looking for three things in a retirement stock: dependable income, safety and a decent chance of long-term appreciation.  Pepsi shares come with a 3.2% dividend yield, which is generous compared with an average yield of around 2% for large U.S. companies.  The dividend payment will take up 46% of forecast 2011 earnings, which suggests it’s plenty affordable for Pepsi.  And the company has a 39-year history of annual payment increases, a sign that’s it’s committed to providing shareholder income.

To judge safety, start with two key questions.  Does the company sell something for which there’s stable demand in good times and bad?  And, does the company carry a risky amount of debt?  Pepsi’s sales are split evenly between drinks and snack food, and it earns steady profits from both.  It has plenty of debt, but so do most packaged food companies, and Pepsi has a touch less debt relative to its income than its peers, on average.

As for long-term growth, three things bode well.  First, those rising dividend payments tend to make shares more attractive over time.  Over the past decade, Pepsi stock has gained 20 percentage points more than then S&P 500 index of large U.S. companies.  Second, the company is investing heavily in fast-growing emerging markets like Russia, where it bought dairy and juice giant Wimm-Bill-Dann in December.  Third, shares look fairly priced at 14 times forecast 2011 earnings, suggesting moderate room for appreciation if the company continues to increase its profits.

There are short-term risks, including rising commodity prices, which can squeeze margins, and long-term risks, like fierce competition and any change in snacking habits, but Pepsi has shown an ability to handle each of these in the past. That said, the stock seems worth consideration as a retirement investment–provided stocks are right for you to begin with, and you don’t stake too much of your savings on a single company.

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    • Dividends plus the emerging markets.
      A keeper?

    • A good product and snack foods to boot.

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