Soda sales fizzing out but consumer goods stock PepsiCo still sparkles

U.S. Key stock PepsiCo earned more in 2014, excluding currency changes and one-time items. It expects to earn more in 2015. This gives this global consumer goods stock the means to keep raising its dividends and buying back its shares. It remains a buy for rising cash and price gains.

We regularly review U.S. Key stock PepsiCo Inc. (NYSE─PEP) on The Back Page feature of The Investment Reporter. Since we published our October 31, 2014, issue, its shares have risen by about three per cent. This global consumer goods stock keeps earning more money each year. It uses its prosperity to reward its shareholders by paying higher dividends and buying back its own shares. PepsiCo remains a buy for long-term share price gains as well as attractive and rising dividends.

In 2014, PepsiCo earned $7.066 billion, or $4.63 cents a share—excluding one-time items and currency changes. This was up by 5.9 per cent from comparable earnings of $6.823 billion, or $4.37 a share, the year before. Earnings per share rose more than overall earnings. That’s because the company spent $5 billion buying back its own shares.

Chair and chief executive officer Indra Nooyi says, “We are pleased to report that we met or exceeded each of our full-year 2014 financial targets. Our results are a reflection of our diverse global footprint, the strength of our integrated food and beverage product portfolio, successful innovation and exceptional marketplace execution.” We think that PepsiCo’s diversified product offering is a plus.

PepsiCo has diversified beyond drinks

The fact is there’s weak demand for carbonated drinks. Health-conscious consumers are drinking fewer drinks with sugar or artificial sweeteners. PepsiCo wisely acquired Quaker Oats in 2001. It sells foods, of course. PepsiCo acquired Tropicana, which makes natural juices without concentrates. PepsiCo also sells snacks such as Ruffles and Lay’s potato chips as well as Doritos, among others. While these snacks won’t appeal to the health-conscious, they still diversify PepsiCo’s consumer goods product lineup.

PepsiCo’s arch-rival, The Coca-Cola Company (NYSE─KO), by contrast, has stuck with drinks. That may explain why its shares are down by 6.9 per cent since we published our October 31, 2014, issue.

In 2015, PepsiCo aims to return from $8.5 to $9 billion to its shareholders through dividends and share buybacks. PepsiCo has raised its dividend for 43 consecutive years. In fact, it has just raised its dividend by 7.3 per cent, to $2.81 a share. That provides a dividend yield of three per cent—provided that you hold it in an RRSP or RRIF to shelter it from the 15 per cent U.S. withholding tax.

In 2015, PepsiCo plans to spend from $4.5 to $5 billion on share repurchases. It’s also launching a new plan that will let it buy back up to $12 billion worth of shares from next July 1, 2015, to June 30, 2018. The company’s share count has fallen each year since 2010, when 1.581 billion shares were outstanding. There are currently 1.488 billion shares.

It improves and invests in its businesses

PepsiCo tries to improve its productivity to increase its earnings. Last year, for instance, it generated productivity savings of about $1 billion. In 2015, it wants productivity savings of another $1 billion. In 2015, PepsiCo expects to invest about $3 billion. This meets its long-term goal of limiting its capital spending to five per cent or less of its revenue.

PepsiCo expects its earnings per share to rise by seven per cent in 2015—excluding one-time items and currency changes. Multiply $4.63 by 1.07 and you get an earnings estimate of $4.95 a share.

A rising dollar hurts profits

The U.S. dollar has soared against the other major currencies. This is hurting American companies in two ways. First, it makes their goods and services less competitive. Second, earnings abroad turn into fewer U.S. dollars.

Consider the impact on consumer goods stock PepsiCo. In 2014, it reported net income of $4.27 a share. Exclude currency changes and one-time items and it earned $4.63 a share.

Given this situation, the U.S. central bank may decide against raising its currency soon. After all, this would send the dollar up even further, which could undermine the economy.


The Investment Reporter, MPL Communications Inc.
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