Is it Pepsi’s turn to dominate?

PEP - Pepsi CoPepsico, Inc. is one of the leading food and beverage companies in the world. The popularity of the brand can be gauged by the fact that Pepsico’s products are consumed one billion times daily in more than 200 countries around the world.

Pepsico operates through six global divisions – North America Beverages (beverage business in the U.S. and Canada) is the largest segment accounting for 33% of the company’s total sales in 2018, Frito-Lay North America (25% – snacks business in the U.S. and Canada), Quaker Foods North America (4% – cereals, snack bars, rice snacks, Real Medleys), Latin America (11%), Europe Sub-Saharan Africa (18%), Asia, Middle East and North Africa (9%).

The company owns a wide range of globally recognized brands such as Pepsi, Lay’s, Tropicana, Quaker, Gatorade, etc. Pepsico’s brand portfolio includes 22 brands, each of which generates more than $1 billion in annual sales. Pepsi is one of the most popular and iconic consumer brands globally, while LAY’S potato chips is the No.1 snack food brand in America.

The company operates through an extensive worldwide distribution network. Food accounts for more than 50% of Pepsico’s revenues while beverage constitutes the remaining.

Investment Data

Revenue Growth & Market Exposure

Pepsico puts in a lot of effort in product development and invests in innovation which helps the company to retain a leading position worldwide. It has been transforming as per customers’ tastes and preferences over the last 50 years. Starting out as a small snack and soda company, Pepsico has today evolved into a large global beverage company with its products being sold in more than 200 countries and 22 of its brands being worth billions of dollars.

Given the increasing health awareness amongst the consumer class, Pepsico is now focusing on launching products with less added sugars, sodium, and saturated fats, and adding more positive ingredients. Most of its food and snack products hold significant leadership positions in the food and snack industry in the U.S. and internationally.

Pepsico has a strong and growing presence in international and emerging markets. International markets constitute over 40% of Pepsico’s overall revenues. The company is in a good position to benefit from growing consumerism in these countries.

The food and beverage giant registered an organic growth of 3.7% in 2018. It is looking at driving top-line growth through expanding its manufacturing capacity, advancing digitization, strengthening the supply chain and brands in the future.

Powerful brands, massive global sales distribution network and top class R&D capabilities make Pepsico a tough player in the industry dissuading new entrants. The company is targeting organic revenue growth of 4%-6% in the long term.

Dividends

Pepsico is a Dividend Aristocrat and has paid consecutive quarterly dividends since 1965. The year 2018 marked the company’s 46th consecutive annual dividend raise. The company has returned more than $45 billion to its shareholders in the last six years (since 2012). It has a relatively low payout ratio of 42% and sports an annual average yield of 2.98%.

Pepsico has successfully grown its EPS at 9% on an average since 2012 and at 15% CAGR over the last five years. Its earnings grew at 9% during the last year itself.

Given its competitive product portfolio and leading market share, the company is favorably placed to implement price hikes in order to offset any input cost increases. Pepsico has been transforming itself with changing consumer tastes and preferences and is poised to gracefully handle any changing consumer trends given its large scale and financial prowess.

The company last raised its dividend payout by 3% and has compounded its dividend growth by more than 8% per annum, over the last decade. Given Pepsico’s track record of increasing dividends and healthy cash flow, investors can expect dividends to continue growing in the high single-digit range. The company is poised to become a Dividend King by 2023.

Competition

Pepsico faces intense competition in the food and beverage categories. It competes with leading brands and broad product portfolios. The company faces competition from small regional and local companies, as well as very large and well-established players.

Some of Pepsico’s products highly prone to the competition are soft drinks, water products, juices, energy, and sports drinks, etc. Coca-Cola is one of Pepsico’s primary competitors. Other significant competitors include Campbell Soup Company, Conagra Brands, Kellogg, Keurig Dr. Pepper, The Kraft Heinz, Link Snacks, Mondelez International, Monster Beverage Corporation, and Nestle S.A.

Bottom Line

A large global footprint with leading market shares, a solid portfolio of products, large scale, and reputed brand name are strategic competitive advantages for Pepsico. A focus on a leaner and efficient organization and customer-centric products should help the company in maintaining and further capturing additional market share. Given, the company’s continuous focus on R&D and developing innovative products, Pepsico is in a good position to generate free cash flow and create value for its shareholders.

Comparing Coca-Cola and Pepsico, I have to admit that I prefer the diversification of Pepsico across the snack business but on the other hand, I like the tea business of Coca-Cola. On the stock value perspective, PEP definitely keeps up with the S&P500 while KO was lagging.

At this point, between PEP and KO, PEP is the better stock but I do like the tea and coffee strategy for KO, it’s just not visible in the share price and everything is still about the primary Coca-Cola drink. 

PEP vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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