PepsiCo (PEP, Financial) has been playing well in the beverage industry and has provided a decent return to its investors over the years. 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 Core Brand'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. This year poses great opportunities for Pepsi. 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 foods and beverages that are loved throughout the world.
PepsiCo achieved strong financial performance in the fourth quarter. The company’s financial performance translated into strong cash generation, enabling it to continue to provide attractive cash returns to shareholders. In 2015 it returned more than $9 billion to shareholders in the form of dividends and share repurchases, bringing cumulative 10-year shareholder cash returns to more than $65 billion.
Fourth quarter
Core gross margin expanded 165 basis points and core operating margin decreased 20 basis points.
Organic revenue grew 4% and reported net revenue declined 7%.
Core constant currency operating profit declined 2%.
Core effective tax rate was 22.5% (which was 25.5% during the prior-year quarter).
Core EPS was $1.06 and reported EPS was $1.17.
Full year results
Organic revenue grew 5% and reported net revenue declined 5%.
Core gross margin and core operating margin expanded 140 basis points and 30 basis points, respectively.
Core constant currency operating profit increased 6%.
Core effective tax rate was 24.3% for 2015 (which was 25.05% in the prior-year period).
Cash flow provided by operating activities was $10.6 billion for the year.
Core EPS was $4.57 and reported EPS was $3.67.
Cash flow provided by operating activities was $10.6 billion for the year.
Core net return on invested capital was 19.6% for the year (which marked an increase of 210 basis points from the prior-year period).
Expectations for 2016
The company expects the following:
- Core EPS to be around $4.66.
- Expected core constant currency EPS growth rate to be around 8%.
- Net capital spending of approximately $3 billion.
- Over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow (excluding certain items).
- The company expects to return approximately $7 billion to shareholders through a combination of dividends and share repurchases.
Dividends and share repurchases
The company also announced a 7.1% increase in its annualized dividend to $3.01 per share from $2.81 per share, effective with the dividend expected to be paid in June. Total dividends to shareholders are expected to be approximately $4 billion in 2016. In addition, the company anticipates share repurchases of approximately $3 billion, resulting in expected total cash returned to shareholders of approximately $7 billion in 2016.
(Source: Company’s website)
Strong attributes of the fourth 1uarter
- Balanced portfolio.
- Consistent marketplace execution.
- Relentless focus on productivity.
- Product Innovation.
Emphasis
The company is currently focusing on the following:
- Innovation.
- Brand building.
- Marketplace execution.
- Pricing actions.
- Optimizing global sourcing.
- It is on track to deliver the five-year, $5 billion productivity savings through 2019.
- Focus on emerging markets.
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 U.S. 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 three 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. 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.
Pepsi is also 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, Pepsi 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, Pepsi is expected to quench the thirst of its consumers in times to come. Over the past 10 years, PepsiCo has returned over $60 billion to shareholders in the form of dividends and share repurchases.
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. Pepsi 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 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. This beverage giant is a buy.
Disclosure: I do not hold any position in the company.
