Although PepsiCo Inc. (PEP, Financial) is not an aggressive growth stock, it continues inching upward steadily. In the past five years, the stock has surged more than 50% and has displayed positive signs of upward momentum this year as well. The stock is up almost 10% year to date.
Soda consumption tumbled to a 30-year low in the U.S. last year. Falling demand for diet sodas sold by Coca-Cola (KO, Financial) and PepsiCo propelled a decline for the broader industry as total sales of carbonated soft drinks plunged for the 12th consecutive year in the U.S. last year.
Despite the negative trend, the company is making good money and is able to generate earnings at a healthy rate. PepsiCo has one of the largest distribution networks in the world. While Pepsi is mainly known for its carbonated beverages, it actually comprises 22 brands with each having sales of over $1 billion every year.
The company has successfully managed to diversify its products portfolio and reduce its dependency on soda and sugary beverages. In 2016, it generated 48% of its revenues from beverages whereas the remaining 52% of its revenues were from food.
PepsiCo recently publicized that it is looking to acquire All Market, owner of coconut water brand Vita Coco, for less than $1 billion. Vita Coco is a leading player in the coconut water market, worth $2.5 billion. The company has ample free cash flow to acquire an All Market without making a significant dent in its cash position.
If the deal goes through successfully, Vita Coco will become PepsiCo’s 23rd brand that could potentially generate $1 billion in revenue in the coming years. Like several other food brands, the company is negotiating customers’ preferences transitioning to healthier foods and beverages considering gradually declining soda sales. With its variety of brands across food and beverages, PepsiCo has outpaced chief rivals such as Coca-Cola.
The company’s current strategy known as “Performance with Purpose” primarily focuses on long-term sustainable growth. It also aims to shift its brand portfolio to healthier products as well as enhanced distribution and productivity while controlling costs.
On the other hand, innovation and development play a significant role in introducing new products to market, and Pepsi has spent a massive amount of cash in doing that. In 2016, the company spent an estimated $760 million on research and development, up slightly from $754 million in 2015.
That appears to be a massive investment in food and beverage that should help the company adapt to shifting consumer preferences and continue to introduce new innovative products to fuel growth.
One more thing that plays an important role is advertising as it acts as a key component in reaching customers. In 2016, PepsiCo spent nearly $2.5 billion for advertising, whereas Coca-Cola spent $4 billion. Despite spending less than Coca-Cola, PepsiCo has achieved better results.
Furthermore, the company currently offers a healthy dividend yield of 2.82%, considerably greater than the consumer goods average of 1.74%. Most significantly, the company has increased its dividend for 45 consecutive years, including the 7% surge last month. The company has a payout ratio of almost 63%, suggesting it still has plenty of room to grow its dividend in the future.
As a result, existing shareholders should continue to hold the stock as its long-term growth prospects look healthy, but shareholders seeking to initiate a position in the stock should wait for a better entry point as it currently trades near its all-time high.
Disclosure: No position in the stocks mentioned in this article.
