Soft drinks have been a hit among people from all age groups. PepsiCo (PEP, Financial) has been playing well in the beverage industry. Over the years, this company has also provided a decent return to its valued investors. PepsiCo is one of the world's leading food and beverage companies with over $66 billion in net revenue in 2014 and a global portfolio of diverse brands. In 2013, PepsiCo ranked 1 on CoreBrand's list of the Most Respected Companies.
The company has a diversified line of products to offer to its consumers. With over 22 brands in its portfolio, PepsiCo's products are sold in more than 200 countries and territories around the world. Each of its brands generated more than $1 billion in estimated annual retail sales.
Disposable income has been rising all over the world and this beverage giant has more room to grow in the near future. 2015 poses great opportunities for PEP. Its flagship brands include Quaker, Tropicana, Gatorade, AMP Energy, IZZE, Naked Juice, Propel, Mug, Frito-Lay and Pepsi-Cola and are engaged in making hundreds of enjoyable foods and beverages that are loved throughout the world.
First Quarter Results
Revenue
Organic revenue increased by 4.4 during the first quarter. Reported GAAP net revenue declined 3% during this quarter due to adverse foreign exchange translation.
Gross Margin
Reported GAAP Gross margin expanded 100 bps. Core gross margin expanded 150 bps.
EPS
Core EPS increased by 1% and was $0.83.
Core constant currency EPS increased by 12% during the quarter.
Reported GAAP EPS increased by 3% and was $0.81.
Operating Profit
Core constant currency operating profit increased 8%. Core results include the impacts of a $39 million pre-tax gain related to a refranchising and a $65 million pre-tax impairment charge in the current-year quarter, as well as the lapping of a $31 million pretax gain related to the sale of agricultural assets in the prior year. Excluding these items, core constant currency operating profit increased 11%. Reported operating profit was down 1% and also reflects unfavourable foreign exchange translation, restructuring charges, and the mark-to-market net impact on commodity hedges.
Cashflow
Cashflow from operating activities during the quarter were $270 million in comparison to $181million in the prior-year period.
Effective Tax Rate
The company’s core effective tax rate was 23% during the quarter (in comparison to 23.7% in the prior year period).
Dividend
PEP recently declared a quarterly dividend of $0.7025 per share of PepsiCo common stock, a 7.3% increase versus the comparable year-earlier period. The dividend is payable on June 30, 2015 to shareholders of record as of June 5, 2015. PepsiCo has paid consecutive quarterly cash dividends since 1965, and 2015 marks the company's 43rd consecutive annual dividend increase.
(Source: Company’s Website)
Projections for 2015
- The company expects to deliver approximately $1 billion productivity savings and $8.5 to $9 billion cash return to shareholders.
- Foreign exchange translation now expected to adversely impact core EPS by 11% points.
- PEP expects 7% core constant currency EPS growth target for 2015.
- Higher interest expense driven by increased debt balances.
- Effective tax rate to be around 25%.
- Net capital spending to be around $3 billion.
- The company expects to return a total of $8.5 to $9 billion to shareholders through dividends of approximately $4 billion and share repurchases of $4.5 to $5 billion.
- Productivity savings of approximately $1 billion.
Drivers for this Impressive First Quarter
- Focus on innovation.
- Brand-building initiatives.
- Marketplace execution.
- Productivity initiatives.
- Cost curtailment.
Opportunities in India
PepsiCo entered India in 1989 and in a short period, has grown into one of the largest food and beverage businesses in the country. PepsiCo growth in India has been guided by its global vision of “Performance with Purpose”.
One of the largest US multinational investors in the country, PepsiCo has been consistently investing in India and has built an expansive beverage and snack food business supported by 38 beverage plants and 3 food plants. PepsiCo and its partners recently announced an additional targeted investment of Rs.33,000 Crore in India by 2020 in the areas of product innovation, increasing manufacturing capacity, ramping up market infrastructure, strengthening the supply chain and expanding company’s agriculture program. PepsiCo India’s diverse portfolio includes iconic brands like Pepsi, Lay’s, Kurkure, Tropicana, Gatorade and Quaker. In two decades, the company has been able to organically grow eight brands that generate Rs.1000 crores or more in estimated annual retail sales and are household names, trusted across the country.
On a Concluding Note
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 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 health problems such as weight gain, poor dental health, diabetes and cardiovascular disease.
It is in talks to introduce a line of products with natural ingredients. Keeping in mind the current obsession of people to shift to all things healthy, PEP has decided to roll out healthier alternatives.
There is an indication that the company will keep its history of consistently increasing dividends. With the recent details of its financials, PEP is expected to quench the thirst of its consumers in times to come.
Over the past ten years, PepsiCo has returned over $60 billion to shareholders in the form of dividends and share repurchases. The company expects to return $8.5 to $9 billion to shareholders in the form of dividends and share repurchases in 2015.
An increasingly evolving middle class, higher disposable incomes and changing lifestyles are key factors that will fuel growth of this company in the beverage industry. PEP offers constantly growing dividends with stable price appreciation.
Foreign exchange translation and transaction headwinds persist. But the company is taking actions to combat the current volatile macroeconomic environment. It is taking responsible pricing actions, tightly controlling costs, and optimizing our global sourcing to minimize and mitigate the impacts of the current foreign exchange challenges. It is taking initiatives to deliver attractive free cash flow growth and cash return to shareholders, and enhance returns on invested capital. I would recommend this beverage giant as a buy.
