# PepsiCo Inc. (NASDAQ:PEP)

## Dividend Discount Model (DDM)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

PepsiCo Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 9.92%
0 DPS01 4.52
1 DPS1 5.38 = 4.52 × (1 + 18.80%) 4.89
2 DPS2 6.23 = 5.38 × (1 + 15.87%) 5.16
3 DPS3 7.03 = 6.23 × (1 + 12.93%) 5.30
4 DPS4 7.74 = 7.03 × (1 + 10.00%) 5.30
5 DPS5 8.28 = 7.74 × (1 + 7.06%) 5.16
5 Terminal value (TV5) 310.44 = 8.28 × (1 + 7.06%) ÷ (9.92%7.06%) 193.48
Intrinsic value of PepsiCo Inc. common stock (per share) \$219.29
Current share price \$169.57

Based on: 10-K (reporting date: 2022-12-31).

1 DPS0 = Sum of the last year dividends per share of PepsiCo Inc. common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 4.88% Expected rate of return on market portfolio2 E(RM) 13.53% Systematic risk of PepsiCo Inc. common stock βPEP 0.58 Required rate of return on PepsiCo Inc. common stock3 rPEP 9.92%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rPEP = RF + βPEP [E(RM) – RF]
= 4.88% + 0.58 [13.53%4.88%]
= 9.92%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

PepsiCo Inc., PRAT model

Average Dec 31, 2022 Dec 25, 2021 Dec 26, 2020 Dec 28, 2019 Dec 29, 2018
Selected Financial Data (US\$ in millions)
Cash dividends declared, common 6,275 5,896 5,589 5,323 5,098
Net income attributable to PepsiCo 8,910 7,618 7,120 7,314 12,515
Net revenue 86,392 79,474 70,372 67,161 64,661
Total assets 92,187 92,377 92,918 78,547 77,648
Total PepsiCo shareholders’ equity 17,149 16,043 13,454 14,786 14,518
Financial Ratios
Retention rate1 0.30 0.23 0.22 0.27 0.59
Profit margin2 10.31% 9.59% 10.12% 10.89% 19.35%
Asset turnover3 0.94 0.86 0.76 0.86 0.83
Financial leverage4 5.38 5.76 6.91 5.31 5.35
Averages
Retention rate 0.32
Profit margin 12.05%
Asset turnover 0.85
Financial leverage 5.74

Dividend growth rate (g)5 18.80%

Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-25), 10-K (reporting date: 2020-12-26), 10-K (reporting date: 2019-12-28), 10-K (reporting date: 2018-12-29).

2022 Calculations

1 Retention rate = (Net income attributable to PepsiCo – Cash dividends declared, common) ÷ Net income attributable to PepsiCo
= (8,9106,275) ÷ 8,910
= 0.30

2 Profit margin = 100 × Net income attributable to PepsiCo ÷ Net revenue
= 100 × 8,910 ÷ 86,392
= 10.31%

3 Asset turnover = Net revenue ÷ Total assets
= 86,392 ÷ 92,187
= 0.94

4 Financial leverage = Total assets ÷ Total PepsiCo shareholders’ equity
= 92,187 ÷ 17,149
= 5.38

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.32 × 12.05% × 0.85 × 5.74
= 18.80%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$169.57 × 9.92%\$4.52) ÷ (\$169.57 + \$4.52)
= 7.06%

where:
P0 = current price of share of PepsiCo Inc. common stock
D0 = the last year dividends per share of PepsiCo Inc. common stock
r = required rate of return on PepsiCo Inc. common stock

#### Dividend growth rate (g) forecast

PepsiCo Inc., H-model

Year Value gt
1 g1 18.80%
2 g2 15.87%
3 g3 12.93%
4 g4 10.00%
5 and thereafter g5 7.06%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 18.80% + (7.06%18.80%) × (2 – 1) ÷ (5 – 1)
= 15.87%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 18.80% + (7.06%18.80%) × (3 – 1) ÷ (5 – 1)
= 12.93%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 18.80% + (7.06%18.80%) × (4 – 1) ÷ (5 – 1)
= 10.00%