PepsiCo: More Than Soda

08/29/2003 12:00 am EST


Charles Carlson

Editor, DRIP Investor

"We stand at the cusp of what may be a revolutionary period for the DRIP concept," says Chuck Carlson, editor of The DRIP Investor,  a leading authority on dividend reinvestment plans. "The reduction in taxes on dividends will lead to a plethora of new dividend-paying firms--which should translate into more companies offering DRIPs." One company that already offers a DRIP is PepsiCo, Carlson's latest buy.

"When you think of PepsiCo (PEP NYSE) you think of soft drinks. However, soft drinks aren't even its largest business. The real driver of growth is the Frito-Lay division. Snack foods accounted for roughly one-third of sales and nearly 38% of operating profits in the latest quarter. Business here continues to grow nicely and provides a healthy balance to the firm's soft drink and juice business. PepsiCo is coming off an excellent second quarter, which saw earnings jump 19%. PepsiCo should keep its momentum going during the second half of this year.

"PepsiCo's soft-drink brands include Pepsi-Cola, Mountain Dew, Sierra Mist, Slice, and Mug. Additional beverage products include Aquafina and Tropicana, and the acquisition of Gatorade has given the beverage unit a real growth boost. Its Frito-Lay unit has a strong stable of leading brand names. This unit is a major reason for the big profit growth. The Cheetos business showed double-digit growth, and a new line-up of 'natural' products from Lay's and Ruffles helped results. The company also saw double-digit growth from its Quaker Chewy bars.

"For 2003 overall, per-share profits should come in around $2.21, up nearly 13% from 2002 levels. Based on those earnings, the stock sells for 21 times expected 2003 results. That earnings multiple is on the low end of the stock's multiples over the last five years. The strong earnings growth should help accelerate PepsiCo's dividend growth over the next several years. Investors who want a quality consumer products company should consider these shares. I own these shares and recommend them for any portfolio."

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