The Motley Fool: Dividends with fizz, crunch

The Fool’s Take

PepsiCo — a global beverage and snack giant with brands such as Lay’s, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker and SodaStream — is looking like a promising investment these days. The company has struggled lately, but its second-quarter earnings report surprised the market, beating analyst expectations. While growth was modest, it showed the company moving in the right direction.

Better still, PepsiCo is a longtime dividend-paying stock — one that has increased its payouts for 54 consecutive years. Those payouts have been growing at a brisk pace, too: The total annual dividend was recently $5.49 per share, up from $4.02 in 2020 and $2.76 in 2015. The dividend yield was recently a hefty 4.1%, meaning that investors will get paid a significant sum while waiting for the company to more fully turn around.

The yield is on the steep side because shares have slumped 20% over the past year, as PepsiCo faced near-term growth headwinds from tariffs and other factors. But over the long term, the company expects its capital investments to deliver 4% to 6% annual organic revenue growth and high-single-digit earnings-per-share growth.

Additionally, PepsiCo has the financial flexibility to make strategic acquisitions as opportunities arise. For example, it recently completed the purchase of functional soda maker Poppi to accelerate the strategic transformation of its portfolio to healthier options.

Ask The Fool

From G.F., Canton, Ohio: What’s going on if a company raises $10 billion when it goes public via an initial public offering (IPO) — when it’s valued much higher, say at $50 billion? Why wouldn’t the IPO raise $50 billion?

In many, if not most, cases, a company will offer only a portion of its value to the public via an IPO. This is typically done to help early investors cash out some shares or because the company has plans for that money.

The remainder of the shares will stay under the ownership and control of insiders. If the company requires another cash infusion later, it can sell more shares on the market via a “secondary offering.”

Companies can also change their number of shares over time by issuing more shares or by buying back shares.

From H.T., Walnut Creek, Calif.: When and why do companies decide to pay dividends?

When companies are young and/or growing rapidly, they often need to spend all their earnings in order to grow. A company might use its earnings to pay down debt, build more factories, hire more workers, buy more advertising or acquire another company.

Over time, it may grow large and stable enough to have reliable excess earnings. At that point, management may decide to commit to paying shareholders a regular dividend. Most often, that will be in the form of a sum announced yearly and paid quarterly.

Healthy and growing companies tend to increase their payouts over time, often annually. To see a list of promising stocks we’ve recommended, many of which pay dividends, try our “Stock Adviser” service at Fool.com/services.

The Fool’s School

Many investors are familiar with price-to-earnings (P/E) ratios, which compare a stock’s current price with its earnings, offering a rough idea of whether it’s overvalued or undervalued. Sometimes, though, due to short-term or long-term issues, a company may have losses instead of earnings. Since you can’t calculate a P/E ratio when earnings are negative, you might want to use the price-to-sales (P/S) ratio instead.

The P/S focuses on sales — also known as revenue — instead of earnings because even companies in trouble are likely to have some revenue. (You can calculate this ratio for profitable businesses, too, of course.) To calculate a company’s P/S, you’ll start with its market capitalization (”market cap”) and divide that by the company’s sales over the past 12 months.

The market cap reflects a company’s current total market value — it’s the current stock price multiplied by the total number of shares outstanding. You can find market caps listed for companies on major financial websites such as Fool.com and Finance.Yahoo.com. (Both of those sites also offer valuation ratios already calculated for you, along with total revenue figures.)

Here’s how you would calculate the P/S on your own: Imagine that Old MacDonald Farms has 10 million shares outstanding and a current share price of $50 — so a market cap of $500 million. If sales over the past year totaled $1 billion, its P/S would be $500 million divided by $1 billion, or 0.5. If its peers have much higher ratios, that would suggest that Old MacDonald Farms is more attractively valued and likely to have a substantial upside relative to its rivals — if it executes its strategies successfully.

By checking a company’s P/S instead of its P/E, you can see how much you’d be paying for a dollar of sales instead of a dollar of earnings. Compare the P/S with sales growth, too: A high ratio isn’t necessarily bad if sales are growing rapidly. But never rely on just one or two measures of valuation when making an investment decision. Check a variety of them.

My Smartest Investment

From N.W., via email: My smartest investment move happened before I started investing on my own: I joined an investment club comprising 10 other women from various backgrounds.

The purpose of the club was to learn more about how to choose stocks. We had speakers come to talk to us, and we developed a spreadsheet that helped us see if stocks met our investment goals. We used Value Line reports to help us make good decisions.

The money we invested in the club was our percentage of ownership in the club. The joining fee was $200, and the monthly contribution was $50, so it didn’t cost that much, but gave us money to invest. The big bonus was finding a great group of friends with similar interests.

The Fool responds: Investment clubs have been around for many years and are a great way to learn about investing. If you balk at pooling your money with other people’s, here’s a handy alternative: Form or join a club that doesn’t require contributions of money.

Without the joint investing aspect of the club, members can still learn together about investing and can study companies., making recommendations to each other. Then each member can go home and invest — or not invest — in each company on their own.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)

Who Am I?

I got my start in 2014, when Burger King (founded in 1954) joined with Canada’s iconic coffee-and-doughnut chain, Tim Hortons (1964), forming me. The private equity company 3G Capital, then based in Brazil, was involved and ended up owning a chunk of me.

Today, I also encompass the Popeyes (1972) and Firehouse Subs (1994) chains. With a recent market value topping $30 billion, I rake in more than $8 billion annually and boast more than 32,000 restaurants in more than 120 countries and territories. I’m headquartered in Canada now.

Who am I?

Forget last week’s question? Find it here.

Last week’s answer: Proctor & Gamble