The Best Kind of Stock to Own for the Rest of This Decade

The Best Kind of Stock to OwnStock market action is pretty tame right now, and corporate earnings are still coming in decent, though not great. But there’s a disconnect; in this stock market, a lot of stocks are trading at or near their highs, but earnings growth over the last three quarters has been flat. I suppose it’s the Federal Reserve’s fault, with its artificially low interest rates and the massive increases to the money supply. But regardless of why, the stock market isn’t overpriced—yet.

Lately, we’ve been looking at companies in this stock market that are not only consistent earnings growers, but they also boast excellent potential going forward, regardless of what happens in the global economy. It turns out that the number of businesses that can grow their revenues and earnings, while also doing well on the stock market in a slow growth environment, is quite small.

So here is the stock: PepsiCo, Inc. (NYSE/PEP). It turns out that the business of selling soda and snacks is stronger and more consistent than almost all other industries. It’s such a simple, yet mature and competitive industry, but PepsiCo’s stock market performance speaks for itself.

You might prefer the taste of Coke over Pepsi, but PepsiCo is a better business. And PepsiCo isn’t just “Pepsi-Cola;” it’s 22 brands and each generates over $1.0 billion annually in retail sales. PepsiCo’s products include: “Mountain Dew,” “Cheetos,” “Ocean Spray,” “Mug Root Beet,” “Seattle’s Best Coffee,” “Aquafina,” “Brisk,” “Lipton,” “Gatorade,” “Frito Lay,” “Doritos,” “Sunchips,” “Tropicana,” “Quaker Oatmeal,” and “7Up”—to name just a few.

Regarding earnings growth, PepsiCo is a consistent winner, and it should break its all-time record high on the stock market this year. The stock currently boasts a three percent dividend yield, and both its dividend and earnings per share have been going up for the last 30 years. On the stock market, PepsiCo hasn’t been down for long.

PEP Pepsico, Inc Stock market chart

Chart courtesy of www.StockCharts.com

Once again, the company beat the Street with quarterly revenues and earnings. The company also announced another increase in its quarterly dividends to 5.6%, starting in June.

This year, PepsiCo expects to generate mid-single-digit organic revenue growth, and seven-percent growth in constant currency earnings per share. When this is combined with the company’s dividend and a new $10.0-billion share buyback program, an investor should expect a total earnings/rate of return of a little more than 10%. A compounded 10% annual rate of return doubles your money every seven years.

There are several other businesses in the stock market that I like, but PepsiCo is one of my favorites for long-term investors. (See “Beat the Market? There’s Only One Way to Do It.”) The company offers a dividend reinvestment plan (DRIP), which you can take advantage of if you don’t require the income. According to Morningstar.com, if you bought PepsiCo shares in August 2009, your simple rate of return to date would be 27%. If you reinvested your dividends in new shares through PepsiCo’s DRIP, your rate of return would have jumped to 41% over the same time period.

I like large-caps, dividends, and DRIPs. I also like the soda and snack business. For the investment risk, owning the right blue chip company with increasing dividends and share buybacks is a better strategy than bottom-fishing for turnarounds.

Corporate revenues and earnings are not consistent in this slow growth environment. So when a company provides that consistency, it’s worth considering. Like I say, there are actually very few good businesses on the stock market at any given time. In my view, PepsiCo is one of them.