Buy PepsiCo for growth and income

PepsiCo trades at a high multiple of its earnings, but that multiple is in line with other large competitors. It’s a dividend aristocrat with 47 years of consecutive increases.

pepsico

PepsiCo is one of the world’s largest food and beverage companies. It has a multitude of brands in the beverage and snack categories.

One of PepsiCo’s top priorities entering 2019 was to accelerate its full-year rate of organic revenue growth. The company’s organic revenue growth (excludes the impact of foreign exchange translation and acquisitions and divestitures) now stands at 4.6 per cent, up from growth of 3.4 per cent a year ago. Each of the company’s six divisions has contributed to this growth.

Frito-Lay North America, for example, has grown its organic revenue five per cent, driven by volume growth and higher prices. Importantly, this business in not only growing, but also winning market share. Frito-Lay has grown its share of the salty, savoury and macro snack categories.

Global reach exceeds 200 jurisdictions

PepsiCo Inc. (NASDAQ—PEP) is a leading global food and beverage company. Its brands include Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. Through its operations, authorized bottlers, contract manufacturers and other third parties, the company makes, markets, distributes and sells a wide variety of convenient beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories.

Its six reportable segments include Frito-Lay North America, Quaker Foods North America, North America Beverages, Latin America, Europe Sub-Saharan Africa, and Asia, Middle East and North Africa.

For the 36 weeks ended Sept. 8, 2019, PepsiCo made an adjusted $5.7 billion (all figures in US dollars unless otherwise noted), or $4.07 a share, compared with $5.9 billion, or $4.17 a share, in the same period of 2018.

Though revenues rose 3.1 per cent to $46.5 billion, operating income declined 1.1 per cent to $7.6 billion. The decrease partly reflected increased investment in the business.

Investing to strengthen its business

Earlier this year, PepsiCo initiated a plan to invest to make its business stronger in five key areas. The company has added manufacturing and selling capacity to meet growing consumer demand; advanced the digitalization of its processes to improve efficiency; increased supply-chain speed and flexibility to better serve customers’ evolving business models; focused its sustainability agenda for greater impact; and strengthened its brands to make its products more desirable.

These investments will likely contribute to a decline in adjusted earnings per share (EPS) this year. EPS is expected to be $5.51, down 2.7 per cent from $5.66 last year.

In 2020, however, EPS is expected to increase 8.2 per cent to $5.96, thanks, in large part, to the benefits stemming from the investments noted above.

In fact, management was already seeing benefits from these investments across its brand portfolio in the third quarter. It says there was strong net revenue growth in its large mainstream brands like Doritos, Cheetos, Ruffles and Fritos and double-digit growth in its smaller premium brands, such as Bare and Off the Eaten Path.

PepsiCo trades at a high multiple of the $5.51 a share that the company is forecast to earn this year. But this multiple is in line with other large competitors such as Coca-Cola.

Meanwhile, the dividend of $3.82 a share, which was raised 15.2 per cent earlier this year, yields 2.8 per cent. PepsiCo is a dividend aristocrat that has raised its dividend for 47 consecutive years.

PepsiCo Inc. remains a buy for growth and some income.

This is an edited version of an article that was originally published for subscribers in the January 2020/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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