Why I love PepsiCo

I have a confession. I love Coca-Cola, and I drink the red can everyday. I drink it pretty much exclusively. But that does not bias me against PepsiCo or any other beverage company. I really love PepsiCo, and wanted to devote today’s post to that love. Yesterday, I stopped in at my local Publix to grab some simple groceries, including a case of Coke, some bread and some jelly. I don’t do much grocery shopping! As I was walking down the beverage/snack aisle, I looked to the left side of the aisle in amazement at a wide economic moat. Almost the entire snack selection was devoted to PepsiCo offerings. In fact, the only product that had any respectable shelf space that wasn’t a PepsiCo product was Pringles (a P&G product). Your local grocer’s offerings may be different, but that was my experience. I looked at the right side of the aisle and it seemed to have the traditional 1/3 Coca-Cola, 1/3 PepsiCo, 1/3 miscellaneous lineup. Very impressive. Dominant.

A little about the company, per Morningstar:

PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages and foods. The firm’s organizational structure comprises three primary business units: PepsiCo Americas foods, PepsiCo Americas beverages, and PepsiCo international. The company’s broad portfolio of brands includes Pepsi, Gatorade, Tropicana, Lay’s, Doritos, and Quaker. 

I think that sums up PepsiCo pretty neatly. The only thing to argue with might be the fact that PepsiCo actually operates in four primary business units: PepsiCo Americas Beverages, PepsiCo Americas Foods, Europe, AMEA (Asia, Middle East and Africa). This, according to PepsiCo’s Investor Profile.

I have consumed many PepsiCo products over the years and can really say that they produce quality products. I personally prefer Coca-Cola over Pepsi, in terms of flavor, but I think there are no substitutes for Mountain Dew, Cheetos and Doritos. And, just because I prefer Coca-Cola over Pepsi in flavor doesn’t mean that I don’t like Pepsi. I love Pepsi and enjoy it immensely. And back to Mountain Dew…Mellow Yellow??? That is a joke of a competitor. I think Mountain Dew has no rival. These comments of mine are a little beside the point, as PepsiCo actually generates approximately 66% of their revenue from the food division. I really like that. I also like that PepsiCo has continually diversified away from the carbonated beverage industry, which may see small growth. I like the Aquafina, Tropicana and Gatorade introductions most. I think all three taste great. I also like the growth in Russia, with the agreement to acquire 66% of Wimm-Bill-Dann. Wimm-Bill-Dann is one of Europe’s biggest dairy products companies.

Let’s take a look at some of the financial aspects of the company.

Earnings per share have had impressive growth.  Over the last 6 years we can see it has grown at an annual rate of 10.6%

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 0.89 0.98 1.19 0.85 3.91
2009 0.72 1.06 1.09 0.91 3.77
2008 0.70 1.05 0.99 0.46 3.21
2007 0.65 0.94 1.06 0.77 3.41
2006 0.60 0.80 0.88 1.06 3.34
2005 0.53 0.70 0.51 0.65 2.39

Revunue growth also looks very nice, pretty substantial. Revenue growth over the last 6 years has averaged an annual rate of 12.9%. I like that.

Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 9,368 14,801 15,514 18,155 57,838
2009 8,263 10,592 11,080 13,297 43,232
2008 8,333 10,945 11,244 12,729 43,251
2007 7,350 9,607 10,171 12,346 39,474
2006 7,205 8,599 8,950 10,383 35,137
2005 6,585 7,697 8,184 10,096 32,562

Let’s take a look at the juicy stuff, dividend growth. Dividend growth has managed a very healthy 14.5% over the past 6 years.That is higher than the growth in EPS. The most recent raise was only 6.4%, which is nice, but I do hope that level goes back up to the 9-10% range going forward. I do think it’s very sustainable. The current payout ratio is just under 50%, which does leave room for dividend growth going forward.

Dividend Per Year ($ Per Share)
2010 1.89
2009 1.775
2008 1.65
2007 1.425
2006 1.16
2005 1.01

Entry yield right now is 3.04%. I think an entry yield over 3% on a company like PepsiCo is very attractive.

People can really go back and forth in the cola wars; PepsiCo vs. Coca-Cola. I think they are both phenomenal companies and both very much worth ownership in any dividend growth portfolio. I own both and I feel great about that. I think they are different companies though. With Coca-Cola, you are getting an iconic carbonated beverage company with a brand and image that can be recognized by almost anyone. I could arguably say that the logo is the most valuable in the world. While they do also produce non-carbonated beverages, they are most known for the Coca-Cola portfolio. With PepsiCo, you are getting a dominant snack food company that also produces beverages that are carbonated and non-carbonated. I really think owning both is the way to go, and you’re covering all bases.

The company has risks, as all companies do. Health awareness can sharply affect PepsiCo, as most of their offerings are generally considered unhealthy. They do offer diet versions of the colas, they have water and sports energy offerings, the oatmeal brand is very healthy and the expansion into dairy and other beverages internationally is all very comforting, however. The long term debt has risen in recent years, and should be monitored. The waste that this company produces can be looked upon as negative by anyone who has their best interests in the environment. However, PepsiCo has recently developed the world’s first 100% renewable sourced PET plastic bottle.

Overall, I am comfortable owning PEP for the long haul. They have a large economic moat, thanks to their dominance in the snack food category and economies of scale. I think buying PEP at levels under $66.47 represent an attractive buying opportunity.

I am long KO and PEP.

Thanks for reading.

Comments

  1. says

    I’ve been watching Pepco and think it is a great company as well. Haven’t done an analysis yet, but I’m pretty sure I would come up with the same conclusion as you…Buy at the right price.

  2. says

    The Dividend Pig,

    Great company, and yes..buying at the right price is key. I think it was overvalued for some time and that’s why the price hasn’t moved up with the general market. I think getting in now represents some value for a long holding period.

  3. says

    I would like to comment about pepsico. Although the company pepsico along with many other large well run firms may be a high excellent quality company. Very often the largest gains in stocks come from companies that are not at the top of their game. When a company is doing everything right theirs less room for improvement simply because its much harder for a great company that doing everything right’ to improve their results even more because they are already getting great results. As opposed to a company thats very much out of favor and has far more room to improve their operating performance their by having much greater potential to increase sales and earning substantially than a company thats already at the top of their game. Its sort of like a star baseball player that is 27 years old and at the top in everything 60 home runs most RBI’s Highest batting average. Triple Crown meaning most home runs highest batting average and most RBIs combined in one season no other player has more of the three than that star player well how do you improve on that you don’t.

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