PepsiCo Inc. (NYSE:PEP) is a global beverage and food company which is organized into four business units: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe and PepsiCo Asia, Middle East and Africa (AMEA). The company has a consistent dividend track record. As a global food and beverage company with brands that stand for quality, and are respected household names — Pepsi-Cola, Lay's, Quaker Oats, Tropicana and Gatorade, to name a few. It has a portfolio of enjoyable and wholesome foods and beverages.
Soft drinks are an all-time favorite among people of all ages. PEP, being the leader in the beverage industry, is constantly innovating new products and techniques for its valued customers. Over the years, this company has also provided a decent return to its valued investors.
People are now much more health conscious as the rate of obesity is accelerating at a great pace. Sugar, being the most important ingredient of soft drinks, is the main contributor to obesity. Health consciousness of people has paved the way to a decline in the consumption of carbonated soft drinks and diet soda in the U.S. market. The only reason for this is numerous health problems such as weight gain, poor dental health, diabetes and cardiovascular disease.
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- PEP 15-Year Financial Data
- The intrinsic value of PEP
- Peter Lynch Chart of PEP
Staying Ahead of Its Competitors
PepsiCo's largest competitors include The Coca-Cola Company (NYSE:KO) and Dr Pepper Snapple Group Inc. (NYSE:DPS). There is an intense competition between the two companies. The companies not only compete in soft drinks, but also have branched out to other beverages including coffee, juice drinks and even water. If Pepsi were to offer a new product it wouldn't be surprising to see Coca-Cola follow suit. Coca-Cola entered foreign markets differently than Pepsi, providing it an edge over Pepsi. While Pepsi invested heavily in foreign markets, Coca-Cola's appointed bottlers with significant experience easily neutralized any threat PepsiCo could pose. As of March 2011, Pepsi was knocked into third place behind Coca-Cola and Diet Coke; Diet Coke outsold Pepsi in 2010. None of this means PepsiCo is a bad stock. But its strengths are widely recognized, while Coca-Cola's prospects get little recognition.
Strengthening Its Financial Position
PepsiCo offers constantly growing dividends with stable price appreciation. The company is also backed its return with a solid financial position. The company is looking to shift its focus toward franchising. This means it is moving its revenue base more towards fees instead of sales. With the move in revenue generation, I think PepsiCo will sustain its returns over the long term.
With a current payout ratio of 50%, and EPS set to grow at 7.95% over the next five years according to analysts' estimates, there is plenty of room for this company to grow. Pepsi was able to grow its revenue at a compounded annual growth rate of 8.65% over the last five years, from $43.2 billion in 2008, to $65.5 billion in 2012. Pepsi was able to grow its dividend at a CAGR of 9.45% over the last 10 years, even through the ups and downs of the economy.
Soaring Expectations from the Indian Market
PepsiCo plans to invest more than $5.5 billion in India. The food and beverage company is one of the largest in India and India also represents one of PepsiCo's largest global markets. The company has 38 bottling plants and three food plants in India, according to its website. It hopes to widen the offerings of food and beverages to cater to Indian consumers' "evolving needs," and noted that it has eight brands in the country that generate more than $160 million in annual revenue. PepsiCo will also increase its infrastructure in India in an effort to increase its selling and delivery capabilities, with a particular focus on rural markets. The company intends to provide resources to its farming program which caters to 24,000 farmers things like seed, expertise, insurance and loans. In order to cut costs by $3 billion through 2014, PepsiCo is also undergoing a strategic initiative.
In addition to India, Pepsi is also expanding in other emerging countries like China, Brazil and Africa through tailored distribution models as well as by offering locally relevant innovation and value-added products. Pepsi is growing its business in developing markets like Russia, Mexico, Canada and the UK.
In order to cut costs by $3 billion through 2014, PepsiCo is also undergoing a strategic initiative. The company has a high return on equity which has remained above 30%, with the exception of a brief decrease in 2005 and 2012. By increasing advertising budgets, the company is heavily investing in its brands in North America. To offset the inflation costs the company is also increasing prices of its products. Since 2002, the annual dividend payment has increased by 13.60% per year. A 14% growth in distributions translates into the dividend payment doubling every five years. PepsiCo has managed to double its dividend every five years on average. Dividend growth has slowed down over the past few years, mostly due to flat earnings since the end of the financial crisis. The dividend payout ratio has increased to 54% in 2012 from 30% in 2003.
One of the main benefits of an investment in Pepsi is that it's a rock-solid dividend stock, even if it doesn't garner the same notability as other high-flying growth stocks. Yet that means it's also likely to crash and burn, and over the long term, the compounding effect of its quarterly payouts, as well as its growth, adds up faster than most investors imagine.
With net revenues of more than $65 billion and a product portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales, PepsiCo is committed to sustainable growth by investing in a healthier future for the investors. PepsiCo is providing stable returns to its shareholders over the years. The company is expected to keep up the momentum. It is expecting to grow its earnings per share by 7% over this year. This indicates that the company will keep its history of consistently increasing dividends. With the recent details of its financials, PepsiCo is expected to quench the thirst of its consumers in the near future.