Pepsi: Pop for Your Portfolio

04/02/2014 8:00 am EST

Focus: STOCKS

Our latest Spotlight Stock has 22 brands that each generate more than $1 billion in annual sales; businesses include Frito-Lay, Quaker, Tropicana, and Gatorade, observes Ingrid Hendershot, money manager and editor of Hendershot Investments.

In the late 1800s, Caleb Bradham, a North Carolina pharmacist, created Pepsi-Cola (PEP). Since then, hundreds of other great brands have since been launched and acquired.

Today, some investors are seeking to have PepsiCo split up the beverage and snack businesses, arguing that the split up would increase value. However, management believes retaining the current business structure will maximize shareholder value.

We agree with management, as the integrated food and beverage company provides economies of scale on an operational, customer, brand, and innovation basis.

PepsiCo sales increased 1% in 2013 to $66.4 billion, with net income popping 9% higher to $6.7 billion and EPS up 10% to $4.32. Return on equity during 2013 was a tasty 27.6%. Growth was strongest in Latin America Foods and the Asia, Middle East, and Africa region.

PepsiCo expects these trends to persist over the long-term, with two-thirds of their future revenues coming from snacks and from developing and emerging markets.

Free cash flow bubbled 20% higher in 2013 to $6.9 billion, with the company returning $6.4 billion of the cash to shareholders, through $3.4 billion in dividends and $3 billion in share repurchases.

Given the company’s strong and sustainable cash flow generation, which is expected to approximate $7 billion of free cash flow in 2014, management announced it would increase by 35% the cash returned to shareholders in 2014 to $8.7 billion.

This consists of a 15% increase in the dividend to an annualized $2.62 per share, marking the 42nd consecutive year of annual dividend increases.

The share repurchase program will also be expanded 67% to $5 billion for 2014. Over the past decade, PepsiCo has returned, on a cumulative basis, more than $60 billion to shareholders through dividends and share repurchases.

Long-term investors should consider popping PepsiCo into their portfolio. PepsiCo is a high-quality company with strong billion dollar brands, bubbly cash flows, and growing dividends and share repurchases. Buy.

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