Pepsi is just keeping up with the S&P500, Nothing More

Pepsico is one of the leading food and beverage companies in the world. The popularity of the brand can be gauged by the fact that Pepsico’s products are consumed one billion times daily in more than 200 countries around the world. 

Pepsico operates through seven divisions – Pepsico Beverages North America (beverage business in the U.S. and Canada) is the largest segment accounting for 32% of the company’s total sales in 2019; Frito-Lay North America (25% – snacks business in the U.S. and Canada); Quaker Foods North America (4% – cereals, snack bars, rice snacks, Real Medleys); Latin America (11%); Europe (18%); Africa, Middle East, South Asia (6%); and Asia-Pacific, Australia/New Zealand and China (4%). Frito-Lay North America is its most profitable business segment accounting for 45% of total operating profits.

The company owns a wide range of globally recognized brands such as Pepsi, Lay’s, Tropicana, Quaker, Gatorade, etc. Pepsico’s brand portfolio includes 22 brands, each of which generates more than $1 billion in annual sales. Pepsi is one of the most popular and iconic consumer brands globally, while LAY’S potato chips is the No.1 snack food brand in America. The U.S. accounts for nearly 60% of total Pepsico’s revenues.

The company operates through an extensive worldwide distribution network. Food accounted for 54% of Pepsico’s 2019 revenues while beverage constituted the remaining 46%. 

Investment Data

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Revenue Growth & Market Exposure

Pepsico puts in a lot of effort in product development and invests in innovation which helps the company to retain a leading position worldwide. It has been transforming as per customers’ tastes and preferences over the last 50 years. Starting out as a small snack and soda company, Pepsico has today evolved into a large global beverage company with its products being sold in more than 200 countries and 22 of its brands being worth billions of dollars.

Given the increasing health awareness amongst the consumer class, Pepsico is now focusing on launching products with less added sugars, sodium, and saturated fats, and adding healthier ingredients. The company expanded its portfolio with healthy options such as bare, Health Warrior, Gatorade Zero, and Pepsi Zero Sugar. Most of its food and snack products hold significant leadership positions in the food and snack industry in the U.S. and internationally. 

Pepsico has a strong and growing presence in international and emerging markets. International markets constitute over 40% of Pepsico’s overall revenues. The company is, therefore, in a good position to benefit from growing consumerism in these countries. Developing and emerging markets contributed an 8% increase in 2019 organic revenue. The company is also growing through acquisitions including recent ones like BFY Brands, CytoSport, Pioneer Foods, etc.

The company continues investing in new plants and lines, distribution infrastructure, and manufacturing capacity to increase its growth capacity. During the second quarter, Pepsico’s global snacks business remained very resilient with 5% organic revenue growth, while global beverages declined by 7%. The demand for snacks should continue to grow in the long term as well. The restrictions on consumer mobility, however, had a significant effect on Pepsico’s performance and the company undertook $400 million of incremental COVID-19 related costs. 

Powerful brands, massive global sales distribution networks, and top-class R&D capabilities make Pepsico a tough player in the industry dissuading new entrants. The company expects its organic revenue to increase within a low-single-digit range. 

Dividends

Pepsico is a dividend aristocrat and has paid consecutive quarterly dividends since 1965. This year marked the company’s 48th consecutive annual dividend raise. It has a payout ratio of 83% and sports an annual average yield of 2.99%. The company expects to return $7.5 billion to shareholders, comprising of $5.5 billion in dividends and share repurchases of $2 billion during the year. Pepsico has successfully grown its EPS at 6% CAGR in the last three years. The company delivered over $1 billion in productivity savings last year and targets to deliver this amount annually through 2023.

Given its competitive product portfolio and leading market share, the company is favourably placed to implement price hikes in order to offset any input cost increases. Pepsico has been transforming itself with changing consumer tastes and preferences and is poised to gracefully handle any changing consumer trends given its large scale and financial prowess. The company’s food and beverage portfolio are complementary to each other, making Pepsico one of the most loved brands in the world today.

The company last raised its dividends by 7% and has compounded its dividend growth by ~8% per annum, over the last decade. Given Pepsico’s track record of increasing dividends and healthy cash flows, investors can expect dividends to grow comfortably in the mid-single-digit range. The company is poised to become a Dividend King by 2023.

Competition

Pepsico faces intense competition in the food and beverage categories. It competes with leading brands and broad product portfolios. The company faces competition from small regional and local companies, as well as very large and well-established players. Some of Pepsico’s products highly prone to the competition are soft drinks, water products, juices, energy, and sports drinks, etc. Coca-Cola is one of Pepsico’s primary competitors. Other significant competitors include Campbell Soup Company, Conagra Brands, Kellogg, Keurig Dr. Pepper, The Kraft Heinz, Link Snacks, Mondelez International, Monster Beverage Corporation, and Nestle S.A.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:KOKOCoca-ColaConsumer DefensiveBeverages - Non-Alcoholic0.6450.52217.0126.2026.201.930.03253.250.849741.640.078068Consumable - DiscretionaryNOYESYESYESUSA1
NASDAQ:PEPPEPPepsi CoConsumer DefensiveBeverages - Non-Alcoholic0.63139.56192.8727.6427.645.050.02932.930.809944.090.108176Consumable - DiscretionaryNOYESYESNOUSA1
NYSE:KDPKDPKeurig Dr Pepper IncConsumer DefensiveBeverages - Non-Alcoholic0.2529.210.000.000.000.000.02052.050.000040.60-0.322931Consumable - DiscretionaryNONONONOUSA1

Bottom Line

Pepsico is well‐positioned to adapt and succeed over the long‐term. The company should leverage the depth and breadth of its portfolio and distribution capabilities to maintain and further capture additional market share position. Pepsico has a long track record of paying and increasing dividends. Given, the company’s continuous focus on R&D and developing innovative products, Pepsico is in a good position to generate free cash flow and create value for its shareholders.

Dividend Adjusted Chart by StockRover.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.