Starting with my Coca-Cola Stock Analysis on Monday, I’m continuing my adventure in the world of soft drinks with PepsiCo. What is interesting about Pepsi when compared to Coke, is that it doesn’t only count on the sales of beverages to make money…

PepsiCo (PEP) Stock Description:

As I just mentioned, PepsiCo doesn’t only manufacture, market and sell carbonated and non-carbonated beverages; it is also a major player in the “snack” industry. In fact, only 37% of its revenue comes from the beverage industry. Its most popular brands are Pepsi, Gatorade, Tropicana, Quaker Oats & Frito-Lay. While Pepsi and Frito-Lay (selling Lays, Doritos, Cheetos, Pretzels and Sun Chips) are not really synonymous of healthy products, they do represent 54% of its revenue  (only counting the divisions in the USA). However, PEP made an innovative turn with Gatorade, Tropicana and Quaker Oats just to name a few. Recognizing that their “unhealthy” product sales growth may eventually be at risk, they quickly worked on or acquired healthier brands. Not to mention that on a dividend perspective, PepsiCo has been increasing its dividend payout for 38 years in a row which makes it part of the prestigious Dividend Aristocrat List.

(PEP) Stock Graph

 pepsico pep stock analysis

PepsiCo Ratios and Financial Info:

 

PepsiCo Dividend Metrics:

–          Current Dividend Yield: 3.04%

–          5 year Dividend Growth : 12.60%

–          1 year Dividend Growth : 6.83%

 

PepsiCo Company Metrics :

–          Sales Growth: 33.79% (1 year) 12.54% (5 years)

–          Earnings Growth: 5.94%

–          P/E Ratio: 18.37

–          Margin Growth: -0.62%

–          Payout Ratio: 47.92%

–          Return on Equity: 33.36%

–          Debt to Capital Ratio: 0.24

 

PepsiCo Stock Metrics:

–          Ticker: PEP

–          Price: 68.60

PepsiCo Upcoming opportunities and dangers:

PEP has been an attractive stock for dividend investors for many reasons. With a continuously increasing dividend while maintaining a low dividend payout (below 50% most of the time), PepsiCo is definitely a strong dividend payer. Over time, we realize that investors get most of their gain from dividend payouts and stock repurchases. Since PEP’s balance sheet is pretty strong, we could definitely think that this strategy will continue to pay healthy yields in the future.

 

When I look at its current business model, I like the fact that Pepsi has been more proactive to make a “healthy turn” by trying to improve its healthy product offering. PEP seems to have left the carbohydrate beverage war to Coca-Cola to concentrate on other markets. Strong from a big distribution structure, it’s easy to provide stores with more products. On top of that, PepsiCo has the financial ability to launch and support new products.

 

PepsiCo is also well diversified geographically. While they can count on a good base of US customers, they generate 48% of their revenues in other countries. They obviously eye any strategy that could bring more sales in the emerging markets.

 

The next war to be won will be cost control with the price of commodities increasing. PepsiCo, much like Coca-Cola is highly vulnerable on this side.

Final Thoughts on PepsiCo

Overall, I can’t say that PepsiCo is a bad pick. In fact, as is the case with Coca-Cola, this is the kind of stock that easily replaces a good bond in your portfolio. If you are patient enough, I think you can end up with a 6-7% dividend yield… sounds like a pretty good move if you are building a retirement portfolio!

 

Disclaimer: I do not hold PepsiCo in my portfolio yet.

 

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6 Comments   |  

6 Comments

July 20, 2011, 4:01 pm

I wouldn’t buy pepsi co. But then again, I’m a momentum investor. So I don’t look to the long term like you guys.

July 21, 2011, 9:13 am

Would you recommend Pepsi over Coke? Do you like the space or overall do you think there is better places to put your money?

July 21, 2011, 5:52 pm

Thanks for the analysis.

I love PEP. I think they are a great beverage company and an even better snack company. The margins are lower on snacks, but they are so dominant in the chip category it’s not even funny. I may pick some more up tomorrow as my second purchase this month after the 3%+ slide today.

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