PepsiCo Inc. (PEP) announced a 5% dividend increase with its Q4 earnings release (Feb. 4, 2025), starting with the June dividend per share (DPS) quarterly payment. 

As a result, PEP stock now has a prospective dividend yield of over 3.93%. That is 42% higher than its average yield of 2.77% over the last five years. This makes it attractive to value investors.

PEP stock closed Thursday, Feb. 13, at $144.58. This article will show how PEP could be worth much more, based on its average yield, as well as a way to play this.

The New Dividend Declaration

The new actual DPS amount has not been declared, since the 5% increase was only mentioned at the bottom of the first page of the Q4  earnings release. This might provide an opportunity for value investors:

“We also announced a 5 percent increase in our annualized dividend per share beginning with the June 2025 payment, representing our 53rd consecutive annual increase.”

I discussed this dividend hike possibility in my recent Jan. 26 Barchart article, “Will PepsiCo Hike Its Dividend Soon? - Looks Likely - Value Investors Love the Stock.”

Some investors/shareholders may be confused, since PepsiCo still has to pay out its last of 4 quarterly dividends at the old quarterly rate ($1.355 per share, ex-dividend on March 7).

(Investors can take advantage of this confusion by selling short out-of-the-money (OTM) put options, which have high short-put yields. But more on that below.)

PepsiCo's Forward Yield

PepsiCo's existing quarterly dividend per share (DPS) rate is $1.355, with 3 decimals (one payment to go, as mentioned). That works out to an annual rate of $5.42, so, at today's price its annual yield is about 3.75%:

     $5.42 existing DPS / $144.58 price = 0.037487 = 3.75%

However, now we know that the forward rate is 5% higher. So, rounding to 4 decimal places (as the company has done in the past):

     $1.355 quarterly DPS x 1.040985 = $1.4225 new DPS rate

That implies an annual rate of $5.69, which is 4.98% higher than $5.42.  (Note, the company has not announced the exact new quarterly DPS rate - this is my guess).

As a result, the new yield is over 3.93%:

    $5.69 new DPS / $144.58 price  = 0.039355 = 3.936% annual yield

However, as I pointed out in my last article, this is well over the company's average annual dividend yield. For example, Yahoo! Finance shows that its average yield 5-year yield has been 2.79%. And Morningstar shows that its average yield for the past 5 years has been 2.77%.

That means its present forward yield is 42% too high compared to its average. But, looking at the Morningstar data, during the last two years - 2.91% in 2023, and 3.51% in 2024 - the average is 3.21%.

That still shows that PEP's forward yield is still 12% higher than its 2-year average. That implies that PEP stock is worth much more, assuming it eventually returns to its mean yield.

Price Targets for PEP

One simple way to set a price target is to dividend the new DPS rate by its average yield:

  $5.69 new DPS / 0.0277 (5-yr avg yield) = $205.42 per share

  $5.69 new DPS / 0.0321 (2-yr avg yield) = $177.26 p/sh

In other words, it seems reasonable to project that the stock price will have an average price of about $191.34, or +32% higher than today's price.

Analysts tend to agree. For example, Yahoo! Finance reports that the average price target for PEP stock from 23 analysts is $163.78, and Barchart's mean survey is $163.42, with a high of $185.00 per share.

Moreover, AnaChart.com, which tracks recent analysts' recommendations, shows an average price target of $165.84 from 18 analysts.

Note that at this price, PEP stock has will still have 14.7% upside (i.e., $165.84 / $144.58), and also a yield of just 3.43%:

  $5.69 / $165.84 = 0.0341 = 3.43%

But that is still over 6.85% higher than its 2-year average yield of 3.21%. And, remember an average implies that the stock trades higher than this number 50% of the time.

So, any way you look at PEP stock, it seems undervalued:

  Forward Yield Target Price = +32% upside

  Avg Analyst Target = +14.7% upside

Therefore, averaging these, we can reasonably expect to see PEP stock rise 23.35% sometime over the next year or so: i.e., a price target of $178.34.

One way to play this while waiting for the stock to rise is to sell short out-of-the-money (OTM) put options in nearby expiry periods.

Shorting OTM Puts

For example, look at the March 14 expiration period, one month from now. It shows that the $140.00 strike price, 3% or so below Thursday's closing price, trades for $1.38 in the midprice.

That provides a short-seller of these puts an immediate yield of almost 1.0% over the next month: 

   $1.38 premium / $140.00 strike price = 0.986% (or almost 1.0%)

Here is what that means. The investor first secures $14,000 in cash or buying power with their brokerage firm. That will act as collateral to secure the purchase of 100 shares (i.e., 1 put contract) if PEP stock falls to $140.00 any time in the next 29 days. 

Then the investor can enter an order to “Sell to Open” one put contract at $140.00 for expiry on March 14.

But, in return, the account immediately receives $138 (i.e., $1.38 premium sold short x 100 shares per contract). That means that the yield to the investor is about 1.0% immediately.

Moreover, even if PEP falls to $140 and the account is assigned to buy 100 shares at $140, the investor's breakeven level is $140-$1.38, or $138.62 per share.

That is an attractive entry price for a new investor into PEP stock. For example, it means they will earn a dividend yield of over 4.10%:

     $5.69 new DPS  / $138.62 = 0.04105 = 4.105% annual yield

In addition, if PEP stock eventually rises to $178.34 (our target price), the upside expected return (ER) is almost 29%:

    $178.34 / $138.62 entry price = 1.2865 = +28.65%

Moreover, the investor can repeat this option trade each month. For example, the expected return over 4 months is almost 4% (i.e., 0.986% x 4 = 3.944%), or about the same yield as holding PEP shares over a year.

The bottom line is with PepsiCo's dividend hike, an investor can earn a good yield and expected return. One way to play this is to sell short out-of-the-money put options in nearby expiry periods.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.