Less Pep for this DRIP Plan

07/12/2012 11:45 am EST

Focus: DIVIDEND

Charles Carlson

Editor, DRIP Investor

A new fee structure makes this drink company's dividend reinvestment plan less attractive, but it still isn't enough to turn investors off the stock, writes Charles Carlson of DRIP Investor.

I hate dividend reinvestment fees. While usually small, reinvestment fees seem to go against the very spirit of dividend reinvesting.

That’s why I was especially disappointed by the new fee structure in PepsiCo’s (PEP) dividend reinvestment plan. The company has instituted a reinvestment fee on investors owning 100 shares or more of the stock.

The fee is 5% of the dividend amount (maximum $2) plus 3 cents per share. The firm will not charge a reinvestment fee on investors owning fewer than 100 shares. In addition to the reinvestment fee, PepsiCo has made other changes to the plan:

  • Minimum initial investment is now $500, up from $250.
  • Fees for optional cash purchases made with a check are now $3 plus 3 cents per share. Purchases made via automatic debit of a brokerage account are $2 plus 3 cents per share. Previously, PepsiCo did not charge fees on optional investments.
  • PepsiCo is also charging a selling fee of $15 plus 12 cents per share for sales placed with a customer service representative.
  • Market orders to sell will be charged $25 plus 12 cents per share.

PepsiCo says the changes are more in line with companies that have similar plans in the industry. While that may be the case, it is too bad that PepsiCo has, in effect, made its plan less attractive for investors.

To be sure, PepsiCo, like most companies, is probably looking for ways to reduce costs anywhere they can. But implementing more fees in a DRIP, especially a reinvestment fee, seems to be especially harsh on your own investors.

Still, I remain a fan of PepsiCo stock. These shares are trading just off their 52-week high of $70.75 per share. The yield of over 3% enhances appeal. I plan to stay with my PepsiCo shares despite the higher fees and recommend other shareholders do the same.

Another thing I hate is a big acquisition. Thus, I can’t say I’m an immediate fan of Walgreen’s (WAG) announcement that the drugstore giant plans to buy 45% of Alliance Boots, United Kingdom’s largest drugstore-chain company, for $6.7 billion in cash and stock. Walgreen has an option to buy all of Alliance Boots in about three years.

Analysts questioned the timing of the purchase given the upheaval in Europe. Actually, that part of the deal intrigued me, as Walgreen could be sensing an opportunity to “buy low” given investors’ fears of the Eurozone. Still, the deal does add to Walgreen’s risk profile when you consider integration issues and overseas expansion.

The firm seems quite bullish on the deal, as it expects the acquisition to be accretive to earnings in the first year by approximately 23 to 27 cents per share. The deal will likely keep Walgreen stock in the doghouse for the next couple of quarters until Wall Street sees how the integration progresses.

On the positive side, Walgreen recently boosted its dividend 22% to a quarterly rate of 27.5 cents per share. The new dividend gives these shares a yield of 3.8%.

Admittedly, Walgreen has been one of the more frustrating stocks in the Editor’s Portfolio over the last five years, but I still like the underlying business and expect the healthy dividend yield to provide some support to the stock price. I am maintaining my holdings in the stock, and patient investors may want to use the recent dip to nibble on this growth-and-income play.

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