PepsiCo (PEP) has 23 brands that each generate retail sales of more than a billion dollars annually, observes Ingrid Hendershot, a value oriented money manger and editor of Hendershot Investments.
Pepsi-Cola, Gatorade, Tropicana Juice, Lay’s Potato Chips, Diet Pepsi, Doritos, Cheetos, Fritos, Quaker, Aquafina, Sierra Mist and Mountain Dew rank among the best-selling brands in U.S. supermarkets.
As consumer tastes shift toward healthier foods and beverages, PepsiCo has responded with baked snacks with lower fat content, such as Stacy’s Pita Chips and Baked Lay’s Potato Chips, and beverages with fewer or zero calories and less added sugar, such as SoBe Lifewater, bubly, Propel and Gatorade Zero.
PepsiCo announced fourth quarter revenues popped 9% higher to $22.5 billion with net income up 5% to $1.8 billion and EPS up 6% to $1.33. PepsiCo ended the year on a strong note with the global beverage business having accelerated while the global snacks and food business remained resilient.
For the full year 2020, revenues rose 5% to $70.4 billion with net income down 3% to $7.1 billion and EPS down 2% to $5.12 reflecting increased COVID-19 related costs. In 2020, return on shareholders’ equity expanded to a tantalizing 52.9%.
Free cash flow increased a bubbly 18% to $6.4 billion during the year with the company paying $5.5 billion in dividends and repurchasing $2 billion of its common stock.
Capital allocation strategies remain unchanged for the long term. PepsiCo’s priority is first to reinvest in its business to drive growth and productivity — then to pay its growing dividend and strengthen its portfolio with bolt-on mergers and acquisitions — followed by share repurchases while maintaining access to debt capital markets at attractive rates.
PepsiCo recently announced a 5% increase in the dividend payment to an annualized $4.30 per share, which represents the 49th consecutive year of dividend increases. The current dividend yields a yummy 3.2%.
The company is not planning any large merger and acquisition activity or significant share repurchases in 2021 as management focuses on debt repayment for recent acquisitions.
For 2021, PepsiCo expects a mid single-digit increase in organic revenue growth and a high single- digit increase in core constant currency EPS growth.
Management assumes that vaccination efforts will accelerate during the year leading to gradual improvement in consumer mobility to venues that sell PepsiCo products. At the same time, PepsiCo expects to sustain greater e-commerce activity due to continued remote work arrangements.
PepsiCo’s long-term target for organic sales growth is 4%-6%. Operating margins are expected to expand 20 to 30 basis points each year thanks to further automation and digitalization. This should lead to high single-digit core constant currency earnings per share growth over time.
Long-term investors should consider popping PepsiCo into their portfolio. PepsiCo is a high quality company with multiple strong billion dollar brands, bubbly cash flows, high profitability and a long-term track record of delivering sustainable sales, earnings and dividend growth. I rate the stock a "Buy".
