PepsiCo Inc. (PEP, Financial) 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.
Performance Analysis
PepsiCo's overall revenues grew by 1.4 percent in 2013 despite a 1.6 percent drop in beverage revenues. That's because beverages account for just less than 32 percent of the company's revenues. PepsiCo isn't just a soft-drink business. It's a snack business, owning such household brands as Fritos, Doritos, Lays and Cheetos, to name a few.
Frito-Lay North America alone constitutes over one-third of PepsiCo’s valuation. This division saw a 4% rise in organic sales, bolstered by both volume and net pricing increases. The company is the leader in savory snacks in the U.S. with a 36.6% market share. Maximum growth for PepsiCo came from Russia and Brazil, reporting double-digit increases in sales. Russia is the largest international market for the company, and together with Brazil, constituted 10% of the company’s net sales last year.
Pepsi is on pace to grow core earnings by 7.5%-8.5% over the coming 5-10 years, and is also receiving 1.5% earnings per share growth from a share buyback program.
PepsiCo achieved operating margins of 14.3%, up 100 basis points over 2013, mainly due to productivity gains. The company had earlier announced its five-year productivity savings plan for 2015-2019, according to which it plans to save $1 billion each year by optimizing global manufacturing operations and simplifying organization systems to drive efficiency. PepsiCo is on course to draw an incremental $1 billion in savings this year, after saving $900 million in 2013, as part of its savings program for the period of 2012-2014.
New Launch
Pepsi has launched the Pepsi Spire, which provides over 1000 different flavor combinations. Customers can select from combinations like Raspberry Lemon Mountain Dew, Diet Pepsi with Vanilla and Strawberry, and Brisk Iced Tea with a splash of Cherry. Pepsi Spire is available in select locations before rolling out into a more national presence.
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.
Emerging Economies Look Promising
While fizzy drinks continue to decline in most developed markets, this segment is still growing in the emerging economies in Asia, Middle East and Africa. Organic revenue in this region grew by 11% in Q4 and the full year bolstered by increasing disposable incomes and a growing middle class. The company witnessed a promising double digit percent increase in China and a high single digit percent increase in Mexico in volumes last year. Mexico is crucial for PepsiCo as it is the company’s third largest market behind the U.S. and Russia. However, the recently imposed taxes on sugary drinks in the country could hamper growth for PepsiCo in the coming year. The Mexican government imposed taxes of one peso (~7.5 cents) on one liter of sugary drinks late last year. This move aims to fight raging health problems in Mexico, which has the highest obesity rate in the world at 32.8%.
Apart from accelerating beverage operations in international markets, PepsiCo also hopes to revive its CSD sales in the domestic market by introducing naturally sweetened fizzy drinks in 2014. The company has tested several naturally sweetened zero calorie versions of its cola drinks, which it plans to launch in the U.S. this year. Natural sweeteners are considered to have tackled the problem of bitter aftertastes and might be able to spur sales of CSDs going forward.
To End
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.
